Total Debt For Hyperinflation Monetization

Bernanke has been using a new trick to keep some money out of circulation, for awhile.  He is paying interest on bank's excess reserves.  This keeps money out of circulation just like the Treasury selling bonds and paying interest on bonds.  I think it is best to view the central bank as part of the government.   In hyperinflation the debt that is due in the first year or two will be monetized.  There is something like $8 trillion in Treasuries due in the next 12 months, out of $16 trillion total.  If people stop buying bonds the government will have to print a lot of money.  This $1.6 trillion of excess reserves at the Fed will also contribute to the hyperinflation as it leaves the Fed, just like money leaving the Treasury.  The deficit of $1.4 trillion needs to be monetized as well.  If people stopped rolling over bonds and banks took out their excess reserves, there could be $11 trillion in newly printed money over the next 12 months.  This is more than enough to start hyperinflation.

Here is another way to think about it.  Imagine that Bernanke was paying interest on $10 trillion and the Treasury only had $8 trillion in bonds longer than were 1 year or longer.  There would still be about the same amount of money "off the street" so the inflationary situation would be the same.   The risk of money flooding onto the street would be about the same.  The interest that investors earned could be about the same.  

Clearly you could also imagine that the Treasury sold $1.6 billion more in short term bonds and the Fed was not paying interest on any excess reserves.   Again this would be the same in terms of interest earned and money off the street.  It would also be the same in terms of danger of money flooding onto the street.  So it is really the total owed by the Fed and the Treasury that matters.

When comparing debt/GDP ratios of the US to countries that have had hyperinflation, I believe one should include these excess reserves that are earning interest.   This makes the US debt/gdp ratio even higher and further above the hyperinflation threshold.

Some people have noticed that this huge excess reserves is new and are rightly worried about what would happen if that money suddenly came into circulation.  But the short term Treasury debt has the same danger.   There is far more short term debt and far less long term debt in private hands these days.  In part this is because the Fed has bought up so much of the long term debt with Operation Twist.  The total short term debt from both the Treasury and the Fed is what can flood onto the market and start hyperinflation.

There are those that view bonds and excess reserves as part of the money supply.   I think it is simpler to just view bonds and excess reserves as government debt and not part of the money supply but this view is valid as well.  However, if you view things this way then you must recognize that the "velocity of money" for bonds and excess reserves is far far lower.   As people move from those to cash it increases the velocity of money and so prices go up.   When viewed this way, hyperinflation more due to the  increasing velocity of money.   But either way you view it, when governments that can print money have too much debt and then people don't want to hold that debt, you get hyperinflation.

QE 1, 2, 3, infinity

"Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed."   Ludwig von Mises

With QE1 there was talk of an "exit strategy" and "unwinding" or "withdrawing the liquidity".   This was claimed to be a temporary injection of money to deal with a liquidity crisis.   When QE2 came with more liquidity instead of an exit, people should have begun to wonder if the extra money was in fact temporary.   But now with QE3 of unlimited amounts, nobody should still be expecting any exit strategy.  As this really sinks in, people will start to flee US bonds.   This will cause the Fed to buy even more bonds, printing even more money.  This will cause even more people to flee US bonds, the Fed to buy more,  etc.  The positive feedback loop or death spiral will start.  The velocity of money will increase.  The quantity of money will increase.  The real economy will be hurt.  Hyperinflation seems unavoidable.

Mish on Hyperinflation

Update:  I expanded the post below into a more general Hyperinflation FAQ.   I also update that post from time to time.  I recommend readers go to that instead of this.  


Mish wrote another post on hyperinflation, something he has called nonsense many times.  I think he is wrong about hyperinflation in many ways.    

I think Mish's biggest mistake is that he defines hyperinflation differently than everyone else. The International Accounting Standard of IAS 29 says there is hyperinflation when "the cumulative inflation rate over three years approaches, or exceeds, 100%.".  This works out to 26% per year.   I have seen many other definitions for hyperinflation but they almost all have something like "inflation over X per year" or "inflation over Y per month".     People pick some inflation rate as the cutoff between regular inflation and hyperinflation.  It is just the values for X or Y that differ.  Mish; however, looks at the typical end result of hyperinflation (currency becomes completely worthless) and then defines that as "hyperinflation". This is wrong. Hyperinflation is the journey, not the end result. It is the time of high inflation, not after inflation stops.  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. 

There are some cases where they have successfully halted hyperinflation. After having inflation over 26% per year they got back down to more sane levels and the currency was not a total loss. In these cases Mish's definition would say there was no hyperinflation (no total loss of faith in currency) while most would say there was hyperinflation but it was halted.   It can sometimes take years for hyperinflation to finish (either halting or death of the currency) and with Mish's definition we could not say till it was all over if it was really hyperinflation. 

Mish thinks there is no chance of hyperinflation for the US dollar.  Hyperinflation happens when debt is over 80% of GNP and deficit is over 40% of government spending. The US is at or near these numbers, so the danger of hyperinflation is real. What happens is that the more the central bank prints money and buys bonds the less other people want to hold bonds. But the less other people hold bonds, the more the central bank has to buy them so the government has enough money to spend. You get a positive feedback loop or death spiral. Please see my writing on hyperinflation.  

Mish thinks that the US having around $400 billion in gold would prevent a complete loss of faith in the currency.  Having assets could delay a complete loss of faith in a currency, but does not help so much at preventing inflation over 26% per year.  It does not matter how much gold the US is holding if they are spending 50% more than 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 when the 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.   By Mish's logic this should have prevented a complete loss of faith in the currency, but it did 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.

Mish thinks people would not decide to have hyperinflation.  I don't believe there has ever been a "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 government or a 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 to government debt over 80% of GNP and deficit over 40% of spending when the central bank starts printing money and buying up government debt. Everyone thinks they just need to print a bit more money to make it through the next week or month and there is nothing else they can do since the government needs money to keep in operation. Nobody votes for hyperinflation. Nobody wants it. It just happens.

Mish thinks you need some major trouble like losing a war and paying reparations to get hyperinflation.  The US won the Revolutionary War, did not pay any reparations, and still had hyperinflation. Remember, "not worth a Continental"?  There was hyperinflation in the South during the Civil War. So I think it is fair to say that America has had hyperinflation twice already.  As someone pointed out in the comments, there were more cases of hyperinflation in America's colonial period.   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.  The US was not in a war in the 30s.  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.

Mish has posted that he thinks a currency crisis is coming.   Even if this is a limited drop in value, like a factor of 2, and not leading to the total destruction of the currency, it could still result in prices going up by more than 26% per year, which many people would count as hyperinflation.  I don't think it will be so limited.   Things are just too far gone.

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?

People may think it is easy to avoid or stop hyperinflation.  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 nearly twice what it gets in taxes and has debt around the size of the GNP. 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 is bankrupt.

Mish can see no reason for the Fed to suddenly print trillions of dollars.  But there is a reason it might happen.   Mish has quoted someone as saying "More than half of the debt, however, is short term, maturing in less than a year."  With a current national debt of about $16 trillion, this would mean about $8 trillion is due in the next 12 months.  If people stop rolling over bonds then the government will need the Fed to print over $9 trillion in 12 months ($8 for old bonds coming due and $1 for the current deficit).   This bond panic and massive buying by the central bank is how hyperinflation seems to typically start.

Mish will say that the Fed on its own could not cause hyperinflation but Congress could.   This displays a lack of understanding of how hyperinflation works.  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.   It is the two together that result in hyperinflation, not one alone.

Mish will say "hyperinflation is a political event not a monetary event".  I think Milton Friendman 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.   

Mish said, "Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion?".   Mish needs 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.

Mish will say 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 Mish can not see how the Fed can put money into the economy.   He is not seeing that 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 but Mish never talks about it.

Mish thinks it is silly to compare the US to Weimar Germany or Zimbabwe hyperinflations because the situations are so different.   Each case of hyperinflation is unique, so if you are looking for differences you will always find them.   You need to understand the similarities.  Hyperinflation happens because 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.

Mish thinks that when China and others arrange things so they can do trade without US dollars that it does not matter.   He thinks if the Arabs stopped pricing oil in dollars it would not matter.  He notes that currencies are fungible, in seconds you can exchange any currency for any other currency, so "it does not matter one iota 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.   Mish does not seem to get this.  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.

Mish notes that all the recent predictions of US dollar hyperinflation have been wrong so far.   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.

Mish notes that 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.

Mish does not think the US central bank would willingly destroy their currency.  He thinks this alone debunks hyperinflation.     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.

Mish thinks that having lots of private debt makes hyperinflation impossible.   Mish defines inflation and deflation in terms of the money supply; however, Mish has his own definition of the money supply.  Mish counts "credit marked to market" as part of the money supply.   So if the bond values are crashing Mish would say there is deflation.   However, as interest rates shoot up when hyperinflation starts, bond values crash.  So you can have 26% per year price inflation, which many count as hyperinflation, at the very same time that Mish's defintion of deflation was met.   In fact, I expect that at the start of most hyperinflations, when bond values are crashing, that Mish's definition of deflation is met.  If everyone else is looking at prices going up fast and saying "this is the start of hyperinflation" and Mish is looking at bond prices crashing and saying "this is deflation", he will look silly.

The debt deflation idea is that as people are paying back debts the total measured money supply can go down.  Since central banks loan money into existence it would seem that after the money was paid back to the central bank there would be no net inflation.  The big thing that these people overlook is that governments never seem to pay down their debts.    In Weimar Germany and Zimbabwe the central bank was just loaning money into existence.    However, those governments could not pay it back but kept borrowing more and more.    The US central government debt has gone from like $9 trillion to $16 trillion in the last 4 years. During the hyperinflation people talk about the central bank is buying government bonds to stimulate the economy, stabilize interest rates, or show faith in the government.  After the hyperinflation is all over, people forget about the central bank buying bonds and just talk about how the government was just printing and spending money.  The historical narrative simplifies out the central bank so it becomes much clearer and looks so foolish.  However, this simplification makes is so that the next victim of hyperinflation does not see they are doing the same thing.   They think of the historical hyperinflations as just stupidly printing and spending money while their current government is just borrowing it.    So the same mistake is repeated again and again.

Velocity of Money

In this post I am looking at some real data for the Equation of Exchange.

The orange line is the velocity of money scaled by 5000 so it can be on the same graph as the other data.  The red line is a measure of the quantity of money.  The blue line is these two things multiplied together.   The green line is a measure of inflation scaled so it can compare to the blue line.

The velocity of money has been trending down since 1980 and is now the slowest in the data available. If we multiply the velocity of money times the quantity of money it roughly matches the price level. If the velocity of money starts going up the price level can go up faster than the quantity of money, which is what happened in the 1970s.

Since the recession started the velocity of money went down sharply and the quantity of money went up sharply.   So far the slower velocity of money has compensated for the increased quantity of money so that inflation is not bad.   This will not last.  The velocity of money is at the lowest level recorded and can not keep going down.  Once it stops going down or starts up then inflation will pick up.

Hussman has shown that lower interest rates lower the velocity of money and higher interest rates increase the velocity of money.  So once inflation picks up and the fed has to try to fight inflation by raising rates it will have the problem that raising rates increases the velocity of money which causes inflation.  This is why it is "hard to put the inflation genie back in the bottle". 

MMT and MMR are Religion not Science

Feynman explains the meaning of science in 63 seconds. The predictions of a theory must be compared to reality and if they do not match then the theory is wrong. Both MMT and MMR claim that making new money to buy up bonds is "just an asset swap" and not inflationary. When a government exchanges new money for debt it is called "monetizing debt". This experiment has been done in significant amounts over 100 times with significant inflation or hyperinflation being the eventual result. The theories of MMT and MMR do not match reality. They are wrong.

Predicting the Timing of Hyperinflation

Bernholz found that debt over 80% of GNP and deficit over 40% of spending historically means a country is headed for hyperinflation.  However, it may be a few years.   Hyperinflation is a positive feedback loop that is sort of a slow motion panic as the population comes to realize that the currency is going down.  It would be nice if we had other data or ratios that could predict the timing of the onset of this panic with higher precision.   Here are some possibilities I think are worth investigating.   This post should be viewed as a list of ideas for hyperinflation researchers and not as an attempt to explain things.  Numbers below are just to make it easier to understand and not known values.  If you have other ideas or know of investigations into how any of these would work please post in the comments.

1. Central bank monetization relative to size of debt.  Eventually the central bank will be monetizing everything in hyperinflation, so maybe after some level we can tell we will get hyperinflation soon.  Maybe when the central bank owns 25% of the national debt then hyperinflation usually starts soon.  
2. Central bank monetization relative to size of deficit.  Maybe when more than 50% of the deficit (new debt) is being monetized there is no turning back and when it gets over 100% people take notice and events start happening faster.
3. Central bank monetizing at hyperinflation rates.  If they are increasing the money supply at 5% per month then probably prices will be going up fast in the near future.
4. Bond Panic.    If everyone stops rolling over their bonds then the end is probably near.
5. How far inflation is above interest rates.  Maybe if the central bank keeps interest rates some amount below inflation for some period of time then things go bad.
6. Money printing rate vs interest rate.  Maybe if they are increasing the money supply by a larger percentage each month than the yearly interest rate on 10 year bonds, then they are headed for trouble.
7. When interest on debt is over 10% of GNP.   In one article it mentions that when interest on the national debt gets to 10% of GNP then you get a crisis.  
8. When debt is 15 or 20 times national taxes.   If debt is 20 times taxes then at a 5% interest rate the interest on the debt would use up all the taxes. 
9. When interest on debt is over 40% of taxes.   In one article it says that no country has gotten to where interest was more than 40% of taxes without getting hyperinflation. 
10. When taxes don't even cover mandatory spending.  If taxes can't cover non-discretionary spending, which government can't cut, let alone interest on the debt or discretionary spending, then could be trouble.
11. Rising interest rates.   When interest rates are rising the interest payments on the national debt will be going up.    This will increase the size of the deficit.  It also means getting closer to Debt/GDP,  interest/GDP,  and interest/taxes numbers that might indicate trouble. 
12. Savings rate for the population.   If people have figured out that you lose money by saving in the local currency then maybe hyperinflation is near.  In hyperinflation people will convert savings into tangible objects.   So maybe you can see this coming by looking at the savings rate in the local currency vs gold, foreign currencies,  or tangible objects.
13. How fast the price of gold is going up in that currency.   If gold is going up fast maybe hyperinflation is near.  For example, maybe when the price of gold in a currency triples in less than 1 year hyperinflation of that currency often follows.  
14. Trade deficit.   If the US dollar is going to be rejected as the international currency then the trade deficit will reverse.
15. Foreign Treasury holdings.    The amount of treasuries held outside the US will probably start to go down just before hyperinflation really starts.  It could be foreigners are the first to dump bonds and so foreigners getting out of a bond market is a good predictor of hyperinflation in general.
16. Debt in foreign currency.  A country that is about to get hyperinflation may find it hard to get loans in their own currency and so have to borrow in a foreign currency. 
17. Not enough money.   If the public becomes convinced that there is "not enough money" then politicians will soon make the central bank print more.
18. Velocity of money.    Maybe the velocity starts to pick up ahead of time or maybe the velocity always slows down so the central bank can  increase the money supply and then it starts to pick up again.
19. Stealth monetization.   Sometimes central banks have printed money but not told people as they think that what people don't know won't hurt them.  Bad sign.
20. Legislature increasing control over central bank.   If politicians get control of the printing press it seems they always switch it into high gear.
21. Increase in rate of printing.   If they are printing faster and faster then hyperinflation is probably near.  Maybe before hyperinflations the government usually buys lots of new equipment for printing money.  So maybe this could be a predictor of hyperinflation.   
22. Third major printing of money.      There was some French hyperinflation where after the third major batch of  money printing it became clear to people that the money printing would be ongoing.   With a QE3 that is also QE-infinity it might become clear there is no exit strategy and that they are going to keep printing huge amounts of money.  
23. Public realizes printing won't stop.  Maybe when the public realizes the money printing won't stop is when things go bad.   When large money printing starts it is usually claimed to be a temporary measure.  But at some point it can become clear it is not going to stop.  
24. Polling Data.   I suspect it is possible to develop a set of polling questions to predict when hyperinflation was coming.   These could be used in countries that were at risk for hyperinflation.   Hyperinflation depends on certain  actions and beliefs of people that result in a positive feedback loop.   A poll should be able to tell when this was about to start.  
25. Printing larger bills.       Maybe after they start to print larger denomination bills hyperinflation is soon.  Maybe if the US mints a $1 trillion coin hyperinflation would soon follow.
26. After losing 99% of value.     Maybe a currency is in danger after losing 99% of its original value.
27. Empty shelves.   When everyone runs out and buys extra food and tangible objects then hyperinflation is coming.  Mises called this a "crack up boom".   Maybe you can tell when there is a "crack up boom" and so tell that hyperinflation is coming soon.  My guess is canned Tuna will be one of the first things to be cleaned out since it last years.
28. How heavy bonds are toward short term.   People seem to first move into short term bonds before they try to get out of bonds and cash.   If everyone is in 3 month bonds then maybe hyperinflation is soon.   If a large fraction is in 30 year bonds then probably no danger.  So some measure of short term vs long term debt may predict hyperinflation. 
29. Bond Traders vs Investors.  If the people buying bonds intend to hold them till maturity then hyperinflation is probably not coming soon.  If the people buying bonds are doing so because they think the central bank is going to buy bonds at higher prices and they just want to flip the bonds, then it would seem the risk of hyperinflation is higher.  The ratio of traders vs long term investors in bonds can probably help in predicting the risk of a bond collapse and hyperinflation.
30. When 10% firmly believe.     There is a theory that when 10% of a population believe something it will become true.  So maybe you can predict hyperinflation by seeing when 10% of the population expects it.
31. Black market and reduced GNP.      When higher taxes, higher inflation, and price controls ravage the economy people move to barter to survive.   As the government loses taxing ability they print money faster.  Maybe some level of black market activity signals hyperinflation is coming.
32.  Risk-on Risk Off Oscillations.   The risk on risk off market swings could get larger right before hyperinflation.   Sort of increasing oscillations till something snaps.
33. Reserve currency / Oil currency status.  If countries stop using dollars for oil, international trade, or central bank reserves, the dollar would probably be in trouble.  
34. Deflation often happens before hyperinflation.  I think of it like the tide going out before a Tsunami comes in.  Maybe some measure of deflation can predict hyperinflation. 
35. Prices for Interest rate sensitive assets vs smaller tangibles.  When interest rates are going up then big things like houses that are usually bought with loans tend to drop in price.   As we get close to hyperinflation we may see the prices for food and smaller tangible things going up fast at the same time that houses and larger things are dropping in price.  Maybe this can be used to predict hyperinflation.
36. Necessities vs Luxuries.  Hyperinflation is a very hard time where people have to struggle just to get the necessities of life.  Luxury purchases go way down.   So prices of necessities go up faster.  Maybe looking at the market for luxuries vs necessities can help predict when hyperinflation is coming. 
37. Gold vs Paper as Safe Haven.  Currently when there is some crisis people rush into dollars.  At some point a crisis will cause a rush into gold.  If we could look at how dollars and gold are used as safe havens over time we might be able to predict hyperinflation.  
38. Currency Controls.  Often a government tries to keep people from getting out of their currency by passing new laws.  This could be a tell that hyperinflation was coming.
39. Price Controls.  Price controls cause shortages and reduce economic activity.  Lower real economic activity leads to less real taxes and more money printing.  This is often part of the run up to hyperinflation. 
40. International Commodities.  Prices for international commodities like oil, rice, sugar, etc. probably adjust faster than local prices as a currency devalues.  So these probably hit hyperinflationary levels (say 26% per year) before the local CPI type index does.  Something like the CRB index could be an early warning sign.
41. Sudden Bank Holiday.   Often when things are falling apart a government will declare a bank holiday and close all the banks.   This may be too late of a hyperinflation warning to be of much use.
42. Foreign exchange rate.  The foreign exchange rate may go down sooner than prices go up.   It can take time for the higher cost of imports and the higher price demand for exports to percolate through the whole economy.  So this could give some warning. 
43. Price of imported goods shoots up.  In Belarus in 2011 the price of imported pampers shot up before the prices of locally produced goods did.  So prices on imported goods shooting up could be a warning signal. 
44. Propping up currency.  If the central bank or government are intervening in the currency markets to prop up their currency then maybe things are about to get out of control.
45. Excess Reserves going into economy.   The US bank excess reserves earn interest, which really makes them just like short term Treasuries.  When money comes out of these reserves, or Treasuries, into the economy the inflation is probably going to go up. 
46. Domino Theory.  There is this widely believed myth that advanced democracies can't get hyperinflation.  Once one of them does (my guess is Japan first) then others probably will follow.  So any of Japan, UK, Europe getting hyperinflation probably indicates that the US hyperinflation is getting close. 
47. Search Frequency.  Using Google Trends to see how often hyperinflation is searched might give us a clue.   Or see how often the Hyperinflation FAQ is accessed.   If people are really getting worried about hyperinflation we should be able to see this on the net somehow.  If FAQ readers are coming from some country it might indicate trouble there.
48. Simulating Hyperinflation.  A simulation of hyperinflation could be adjusted to try to make it fit, as well as possible, many historical cases of hyperinflation.   Once it was tuned, the current situation could then be fed in and a good estimate of when hyperinflation would hit should come out. 
49. Big Mac Index.  Government measures of inflation often are distorted and late.  The Big Mac Index may show inflation first.  It is interesting that in Japan the Big Mac has gone up in price by 20%.
50. Central bank viewed as funding the deficit.   When popular opinion has it that the central bank is funding the government deficit, then there will be trouble.  Might do polls and when this view got over some limit you might have a good predictor.
51. Using Multiple Theories.  Using descriptions of hyperinflation from many different theories we could make a bunch of polling questions to see when we were getting close to hyperinflation. 
52. Borrowing for Interest.  If the government has to borrow not only for the primary deficit but also for the interest payments, then the markets might think this is too much.
53. Smart Money Fleeing Country.  When the smart money is getting out of a country it may be that they see the hyperinflation coming. 
54. Monetization equal to debt X years back.   Maybe when the total monetization equals the debt from X years go (maybe 6 to 10 years or something) then you will get hyperinflation. 
55. Years of interest comparable to days of volatility.  Maybe when 5 years of interest makes you about as much as you lose in one week of currency drop then people give up.   Maybe it is 10 years vs 10 days, or some other numbers.  But at some point the risk/reward is clearly that of a bad investment and people flee.
56. Monthly bond loss more than yearly interest for X months.  Maybe after some amount of loss on the value of the bonds compared to the yearly interest then people get fed up and leave bonds.
57. Net Debt.   The net debt is the debt owed by the government to the public, ignoring any bonds from one part of government to another.   In the US case all the "social security fund" is just internal pretend bonds that should be ignored.  It seems that Japan's 240% of GNP drops to around 100% of GNP if we just look at net debt.  This would explain why they have lasted so long. 
58. Money supply going up fast.   Maybe the current M2 measure of the money supply will go up faster right before hyperinflation starts.

If some hedge fund (or anyone else) wants to hire me to investigate this and would provide me with some assistants to collect and process the data I am interested.  I am sure that understanding exactly when hyperinflation was coming would let one make exceptional profits.

Money and Bonds

A government bond that comes due tomorrow will turn into money tomorrow, so it is not very different from money.   In fact, a bond that comes due 30 days from now is still not very different from money.   Most of the time money changes hands slower than once every 30 days.  But a 30 year bond is very different from money.   In this case someone has given up their money to the government for 30 years.  They may be able to sell the bond and get some money now, but not necessarily as much as they paid for the bond.  And if they do sell the bond then there is someone else who has given up money till 30 years from now.   So when the government sells a bond it removes some cash from the economy for that period of time.

Imagine the government's debt was evenly spread out over bonds that came due over the next 30 years.  Then in any one year at most 1/30th of the debt would come due.  This is a far more secure financial position than if all the debt was in 1 year bonds that came due over the next 12 months.   If interest rates go up and all the bonds have to be refinanced over the next 12 months it is as if the government has a variable rate loan where the payments can go up.   If this year the public does not want to buy bonds the government would have to print for 1/30th of the debt in the first case and all of  the debt in the second case, which is far more inflationary.

The Fed is currently trying "operation twist" and now talking about sterilized QE.  Essentially they are buying long term bonds and selling short term bonds.  They claim this is sterilizing their liquidity operation.  But since a short term bond is much more like money than a long term bond it is not fully sterilizing.  If they buy 30 year bonds and sell 3 month bonds then they are really only sterilizing for the next 3 months.   This is 1/4th of a year out of 30, or 1/120th sterilized.   Less than 1% sterilized.  After that all the inflationary pressure may be released.

One of the core ideas of central banking is that they should only buy short term debt that is sure to be paid back.  If they do this then they can always withdraw any money they added earlier.  In this case they always have the ability to prevent inflation.     However, the market price of a 30 year bond could drop in half if the interest rate goes up a few points.  So if the Fed tried to sell a 30 year bond after the interest rates start to go up they might only withdraw half of the money they added.  If the interest rates go up alot they might only be able to withdraw 1/10th of the money they added when they bought the 30 year bond.   If the value of a 3 month bond drops they can just wait out the 3 months and still get the full value back.  But they may not have the option to wait 30 years if inflation starts to pick up.   So buying long term bonds runs the risk of adding money that can not later be withdrawn.    

The government would be safer to move as much debt into 30 year bonds as they can.  Instead the Fed is getting people out of long term bonds and into short term bonds.   This puts the government in a more dangerous position. Moving to short term bonds is part of the setup for hyperinflation. 

If people have 3 month bonds, then if they decide the dollar is losing value they can get their cash in 3 months and never buy bonds again.  If everyone is in short term bonds then everyone can get out in a short period of time.  In this case the government has to print money like crazy to pay off all the bonds (ok really the Fed will be the only buyer of bonds and they are using new money).  This is the recipe for hyperinflation.

How can a government run out of money?

The MMT and MMR folks are fond of saying that "a government that is a currency issuer can not run out of money".  But this is not true!    Money is any object or record that is generally accepted as payment for goods and services and repayment of debts. After hyperinflation their currency is no longer accepted as money.  They can still print pieces of paper but nobody uses them for commerce any more.  So the accurate statement is that "a government that is a currency issuer can not run out of currency".   Any government, even one that prints currency, can run out of money.

Gold vs Silver

Gold works best for central banks issuing paper money backed by a commodity.   It is easier to transfer really large amounts of value around.

However, for coins gold is just too valuable for everyday transactions.  A very small 1/10th oz coin is $170 worth of gold.  You can't really make them smaller than this and still have them feel like a coin.  So if you go to the store to buy some food and give them your $170 coin, how will they make change for you?  So if you want to use coins with a real intrinsic value, gold is just too valuable.  Through history silver coins were the main money.

In the 1970s two brothers were able to buy so much silver and silver contracts that they drove the price up to about $50.  Today there is at least 10 times as much money out there but there is actually less silver above ground today.  For the last 40 years silver has not been used much as money and has been used up in film and other things.  So there are many more people, companies, or countries that if they wanted to could buy up so much silver that they drove the price up far higher than back in the 1970s.

If we get hyperinflation and people lose faith in paper money in general they will want coins that they can use for trade.   By that point the value of gold will be far higher than today compared to food.  So it will work even less well than it does today.   Silver will make for far more practical coins.

So if we get hyperinflation in several paper currencies, like the dollar, the yen, and the pound, and maybe the Euro, then silver will shoot up in value even more than gold.

Is this the beginning of the end for the dollar?

The US runs a trade deficit and normally the rest of the world increases their Treasury holdings every month. However, last month the Foreign treasury holdings went down $17 billion.

Part of the usual hyperinflation situation is that people stop rolling over bonds and get their cash as the bonds come due, and the central bank ramps up cash production. So I have been expecting this.  Some people like Pettis and Mish have claimed that mathematically the world has to keep buying Treasuries, but I don't think that is true at all. If the world stops buying, then the Fed will buy more Treasuries with newly made money. The more the Fed makes money the less people will want to hold US debt. The less people want to hold US debt, the more the Fed will have to buy with newly made money so that the US government can continue to cover their expenses. This is the kind of positive feedback loop that drives hyperinflation till the currency is destroyed.

So I will be watching the Treasury report this week with great interest.  A new report comes out on the 15th or 16th. If Foreign holdings drop again, I think it will be very significant news. I think they will drop.