MMT: Fear of Hyperinflation

An article by Edward Harrison originally posted at Credit Writedowns.

I am 100% sure that the U.S. will go into hyperinflation. Not tomorrow, but the problem with the government debt growing so much is that when the time will come and the Fed should increase interest rates, they’ll be very reluctant to do so and so inflation will start to accelerate.

Marc Faber, Bloomberg, May 2009

During the world’s last inflationary period in the 1970s, the West witnessed social unrest of the most acute kind, bordering at times on anarchy.  If stagflation can lead to anarchy, hyperinflation can lead to and has led to much worse. Hyperinflation is the economic apocalypse many doomsdayers pose as the logical end to the world’s experiment with fiat money.

In a letter to clients last June, Rob Parenteau of the Richebacher Letter wrote about Weimar, one of the worst episodes of hyperinflation:

"The Weimar Republic, born of a revolution in 1918, played host to a hyperinflationary breakdown of the German monetary system by 1923. Austria faced a similar episode of hyperinflation in 1921–2, and no doubt, the searing scars of these experiences deeply informed the thinking of Mises, Hayek, Haberler, Machlup and other leading contributors to the Austrian School in the 20th century.

"Hyperinflation episodes are characterized by rapidly accelerating inflation, a collapsing foreign exchange rate and, eventually, a widespread disorientation and disruption of productive activity. Keynes, writing in 1919, well before the terminal stages of the Weimar hyperinflation had been revealed, characterized the nature of the mayhem involved in such episodes as follows:

"As the inflation proceeds, and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery."

Is this what awaits the US or the UK? Marc Faber’s quote to open this post is symptomatic of the kind of rhetoric which says yes. I love Marc Faber. I consider his interviews first-class economic entertainment.  You will continue to see him featured in my posts on a regular basis. And I certainly share some of his concerns about inflation, bailouts, moral hazard (and so forth and so on, as he would say).

But, is Marc Faber an ideologue pushing a rhetorical line of argument to the point of hyperbole or should we take his warnings very seriously?

Let’s attack this question using Zimbabwe and Weimar Germany as examples.  These are the two most extreme cases of hyperinflation that economic historians have ever witnessed.  They are instructive in regards to what causes hyperinflation and what does not.

Weimar Germany 1919-1923

After World War I, every nation which fought was broke because of the war’s cost. No country had enough gold assets to repay the billions of dollars they owed. And this was a multilateral problem. For example, Britain could not repay its debts to the US until the other Allies repaid their debts to Britain. The Americans were not sympathetic. The prevailing desire was recovering the over $25.5 billion the US had loaned to other nations during the war.

As a result of these debts, the war’s victors laid out draconian terms to punish the Germans in the Treaty of Versailles in 1919. War reparations were one third of Germany’s spending. Therefore, Germany’s budget deficit was half of GDP. (The situation in Iceland due to Icesave’s collapse comes to mind here).  And to make things even worse, reparations were in a foreign currency. 

It’s not as if the Germans could print off a bunch of Reichmarks to make good on their reparations. When the Germans defaulted on their obligations, the Belgians and the French moved in and occupied the Ruhr region, Germany’s industrial heartland. The result was widespread strikes and idled productive capacity. Afterwards, demand for goods in Germany far outstripped the productive supply.

So, with a huge portion of tax revenue going to pay reparations in foreign currency, the German government turned to the printing presses to make good on its domestic obligations. The surge in money supply and the lack of productive resources led to hyperinflation and collapse.

The key to Weimar’s hyperinflation was two-fold.

  1. The German government had a large foreign currency debt obligation.
  2. The German economy lost huge amounts of productive capacity causing prices to soar as demand outstripped supply.

That’s Weimar.


While the facts in Zimbabwe are different, the underlying causes for hyperinflation were the same: foreign currency obligations and a loss of productive capacity.

Zimbabwe had established Independence from Britain in 1980. Yet, by the late 1990s 70% of productive arable land was still held by the small minority 1% of white farmers in the country. After years of talk about redistribution, in 2000, the President Robert Mugabe began to redistribute this land.

The redistribution process was a disaster, both legally and economically. Many whites fled as violence escalated. The result was an enormous decline in Zimbabwe’s agricultural production.  With agricultural production having plummeted, Zimbabwe was forced to pay to import food in hard currency.

Meanwhile, the government turned to the printing presses to fulfil its domestic obligations.  as in Germany, the foreign currency obligations, the loss of productive capacity and the money printing was a toxic brew which ended in hyperinflation.

Hyperinflation in the UK or USA?

So, that’s a brief outline of what happened in the two most notorious cases of hyperinflation.  Notice that in each case you had an enormous foreign currency obligation and a massive loss in productive capacity. The U.S. has not suffered this kind of loss. In fact, productive capacity swamps demand for goods in the U.S. And, as the embedded presentation on hyperinflation from Marshall Auerback shows, the fiscal deficits in the U.S. are a far cry from the 50% of Weimar.

Will the US turn into a modern day Weimar Germany?


Marshall talks about this using an MMT framework. But, his three most compelling slides on pages 4 to 6 don’t depend on MMT. They simply demonstrate that without pricing power or a large fiscal deficit and large foreign currency demands, talk of hyperinflation is misguided. Crucially, Marshall writes:

Inflation is ultimately about competing distributive claims over real resources. The main limitation then, or rather the determinant of the limits of a “sustainable” fiscal policy, especially with respect to hyperinflationary risks, have to do with real resource constraints, not “running out of money” or absence of government financing, for countries possessing sovereign currencies.

The inability to tax and dependency on foreign currency are central to hyperinflation or national solvency.  Moreover, in Zimbabwe and Weimar, it was the trashing of productive supply that created inflation (think supply versus demand).


So, that’s the economics.  What about the ideology?  Well, the MMT’ers say that the Austrians ideologues and the gold fetishists have a deflationary bias when inflation doesn’t change the real productive capacity of a nation. Clearly, the hyperinflation talk is a gimmick with which to discourage deficit spending. You should see this debate as about a specific policy prescription driven by ideology. The other side of this ideological divide was taken up by Dean Baker in the Guardian’s “Cliches won’t fix the financial crisis

Nevertheless, inflation does alter business decision-making via accounting’s tie to nominal numbers and the money illusion. Moreover, inflation reduces relative wealth by transferring income from those who receive the money first like banks versus those who receive their money later, your typical widow living on fixed income bonds and annuities. Finally, inflation encourages the accumulation of debt by benefitting borrowers over savers.  I see inflation as a problem to be avoided.

Ideologically then, I see inflation as the increase in the money supply.

Economics. an increase in the VOLUME of money, which eventually leads to a persistent, substantial rise in the general level of prices and results in the loss of value of currency.

What is Inflation?, Credit Writedowns, June 2008

And where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency. 

So, people like me look at large government deficits in a fiat currency system as an invitation to print money and inflate the money supply. If you take this way of thinking to a logical extreme, you end up with what Marc Faber is talking about: hyper-inflation.

But, this is ideology – not economics. The claims of hyperinflation awaiting the US or the UK seem hyperbole at best, misinformation and deception at worst.  Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. So, it simply isn’t credible to claim that Hyperinflation in the US or the UK is in the offing now or anytime in the immediate future.

As for Anarchy in the UK, that’s another matter.

Cue the Music.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. ndk

    Ideologically then, I see inflation as the increase in the money supply.

    I still disagree, but it’s terminological, and I wish economists would actually iron crap like this out so we could talk in common terms.

    And where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency.

    And, of course, lower interest rates. This has a strong distortionary effect on the underlying real economy, weighting consumption and investment preferences in perverse ways. Consider the extreme over-investment in residential real estate, or industrial capacity in China. I view this reallocation as being at least as important as the impact on the monetary aggregates and claims on such assets.

    I have never seen the U.S. as likely to inflate. It’s impossible as long as China stays pegged — and they’re stayin’ pegged, as it’s in their best interests to do so — and it would be very difficult even if it weren’t.

    Buiter’s recent publication was something of a breath of fresh air here, but I still disagree with a lot of what he wrote. I don’t think the US would even really want to inflate if we could. Political and financial power are very concentrated in the hands of creditors right now(electoral finance lol).

    Creditors have a variety of incentives not to inflate, and further indebting the sovereign to them, particularly to cover their losses on other loans, suits them just fine. The populace have become ardent deficit hawks, having rationally seen that most of the deficit spending has no apparent benefit to them and direct benefit to the slimeballs on top.

    For both the government and their creditor overlords, inflation and hyperinflation are not attractive outcomes. Selective, preferential sovereign default has always seemed much more probable. That gives creditors/the government the ability to strip others of their claims — like, say, China and Japan — and consolidate even more power.

    I’ve been long T-bonds and T-notes and the USD for a long time, and shy of revaluation of the RMB and serious political changes in the US, I will hold those positions. There will be no meaningful inflation.

  2. Sharonsj

    It also took me a while to understand that economists have a different definition for inflation. For everyone who is not an economist, inflation means the cost of everything goes up. We have had creeping inflation for some time and it has gotten mush worse over the last two years.

    When pet food goes up 50%, sugar goes up 30$, and my favorite candy–which was $1 for 12 oz–is now $1 for 8 oz (33%), inflation is not creeping anymore. Now I see that the price of meat is shooting up too. Yet no media is talking about this. Couple this with stagnant wages–or no wages at all–and you will see more violence in America.

    1. Albatross

      Violence, nah! Not in the U.S.

      Keep the masses on hi-level garbage entertainment, fast food, etc.

      It’s not 1960s anymore, I’m afraid average joe/jane has become complete zombies incapable of making any sound analysis of their lives.

      1. Skippy

        Yep, if you can get an adult to stand in line for hours with their kid[s, just to have a 5 min ride at Disneyland, their permanently modified.

        Skippy…a country of advertising receptacle’s.

    2. Ishamel

      The whole inflation vs prices thing confused me as well. And it’s also completely bogus. No layman gives a rat’s butt about money supply — he cares about prices of goods. That’s his inflation. Economists are perfectly aware of this and basically are in the business of deceiving the public by insisting on using their own definitions.

      Let me reiterate this point to whoever keeps spewing about money supply increases as inflation, etc. MOST PEOPLE DON’T CARE. We think of inflation as price increases — get off your academic horse and use it that fashion!

      Talk about money as money supply so that we can just ignore you and not be deceived and confused when you talk about inflation or deflation.

      1. Edward Harrison Post author

        If you read the link on inflation, you’ll see I said:

        “But, the average person has an eye firmly attuned to the price levels of goods and services, because that is what one can see and observe. One normally looks for signs of inflation there.”

        Read more:

        Consumer Price Inflation IS the common standard economists use. AND it what you hear on TV as inflation to boot. But, consumer price inflation is the outcome, the symptom. It is not the cause. The cause is an increase of money.

        1. ndk

          “Consumer Price Inflation IS the common standard economists use. AND it what you hear on TV as inflation to boot. But, consumer price inflation is the outcome, the symptom. It is not the cause. The cause is an increase of money.”

          Or, the velocity of money increasing. Or, a shortfall in supply of consumer goods and services. Or, inflationary expectations themselves. Or…

          I don’t think you do your analysis any favors when you oversimplify things. This is particularly true since the disconnect between money supply and nominal production has become so gaping over the last thirty years. We call it 370% debt to GDP, and it would be very difficult to explain if your specific link were the only causal factor.

          1. Edward Harrison Post author

            Velocity has to do with the demand for credit and its relationship to the monetary base. When the demand for credit is low, this brings velocity down. I don’t look at velocity because i am as concerned with asset price inflation as I am with consumer price inflation. And asset price inflation is not dependent on velocity but on the money supply.

          2. ndk

            @Edward, right, I agree, but why would asset price inflation necessarily lead to consumer price inflation?

            Yes, it increases/pulls forward demand in the present, directly stimulating investment through a concomitant fall in interest rates and artificial support for consumption. Remember the MEW effect? It also deflates the savings rate.

            When the effects of asset price inflation wear off(and remember, we just need the growth in valuations to slow or stop, not even a decline in asset prices), we’re left with an enormous overhang of both credit and investment. The consumers of goods and services that compose the CPI are most generally debtors and not the creditors.

            You get a world where CPI can’t increase due to overinvestment, and credit can’t decrease due to forcible government intervention.

            I think asset price inflation does not and will not translate into a rising CPI. I think it has and will continue to translate into a falling CPI.

          3. zanon

            not true ed harris:

            asset price inflation is also consequence of velocity.

            remember, to get a price impact you need a transaction. all transaction is part of velocity.

            if money just sit there doing nothing in bank account, it has no impact on prices or inflation.

      2. TDK

        And yet money supply is a useful way of looking at it, even from the consumer’s perspective of those you call “most people”. It might be easier taking the reverse: deflation. If prices drop because of competition or efficiencies in production then “most people” benefit. That’s not what economists call deflation, though. But if prices drop because the money supply contracts — economic slowdown, people lose jobs — then stuff may cost less but may be even less affordable. In that case prices decrease because “most people” can no longer afford to bid the prices up. Similarly, inflation might not be (and if not too high historically isn’t) a concern for “most people” if their income rises commensurately. If it doesn’t (stagnant wages, other countries bidding up certain commodities like oil, etc) then you hear about it.

    3. Mark

      The rise in prices of commodities (especially energy) is not being primarily caused by monetary policy, but by supply and demand dynamics. It’s global in nature, and was been going on well before massive $1T+ deficits and quantitative easing began in 2008.

      Is more expensive gas and chocolate “inflation”? I have to echo the other comment, and express my frustration over the vagueness of terms economists use. I wish they would just say what they mean. How about “Commodity price rise”, “money supply growth”, etc.

      I think this blog post is spot on. Almost to a tee, those discussing hyperinflation are ideologically driven, not basing their opinions on rational economics.

      1. MindtheGAAP

        “The rise in prices of commodities (especially energy) is not being primarily caused by monetary policy, but by supply and demand dynamics”

        Please be careful with how you define energy. Natty hasn’t gone anywhere. Electricity prices–at least in the Midwest region, which I am most familiar with–are very sharply down from 2008 (a few utilities may be facing some serious cash problems soon because of this, incidentally). For MISO prices, look here:

        Oil is up, but to my knowledge, that’s the only energy-related commodity that’s really done well. I am NOT following the energy markets closely, so I have no idea what coal or uranium are doing, and I could be off, but I know that electricity prices are causing big headaches for a lot of utilities, who depend on that revenue for both planning capacity and to pay off their debt loads.

      2. Andrew Bissell

        I think this blog post is spot on. Almost to a tee, those discussing hyperinflation are ideologically driven, not basing their opinions on rational economics.

        In other words, an “ideologue” is someone who doesn’t share your ideology.

  3. The Raven

    You know, we have lost a lot of productive capacity, due to Chinese currency manipulations. If that continues, it will become an issue. Is it one right now? I doubt it, but I don’t really know.

  4. David

    What if your wrong? A Social Security and a Medicare crisis is comming down the pipe fast and are you saying that bond investors are just going to sit their and take it? Bernanke will start printing like a madman the moment the bond vigilantes that have woken up to Europe change their focus to the U.S. Maybe we can hold out longer than the rest but the conditions you site, that need to be present for hyperinflation are just like standard economic models…completly useless. Panic and animal spirits are a real concern.

    1. Edward Harrison Post author

      “Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. So, it simply isn’t credible to claim that Hyperinflation in the US or the UK is in the offing now or anytime in the immediate future.”

      1. David

        According to standard economic models. Look at were those models are now. I here a lot of if x then y explanations to the readers of this blog and yet no acknowledgment of a black swan. If we find ourselves no longer able to borrow at decent interest rates there will be problems. Economics was fun while it lasted, meanwhile I’ve changed my major to agriculture. I can’t afford to not have a backup plan.

      2. Terry

        Ed–I greatly appreciate your counterpoint to Marc Faber, who I generally find a little beyond the pale. Still, I don’t believe your look at hyperinflation is by any means conclusive. Let’s take a look at your self-quote above:

        “Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. So, it simply isn’t credible to claim that Hyperinflation in the US or the UK is in the offing now or anytime in the immediate future.”

        Ok, I agree that foreign currency obligations and loss of tax revenue and productive resources have been pre-conditions of passed hyperinflation events. Are they the only possible causes? Probably not–others refer to black swans and long tails. Are we sure that these two pre-conditions don’t or won’t soon exist in the US? And, for crying out loud, what does “immediate” mean–tomorrow, next year, this decade, after I die (I’m a geezer)?

        In short, your argument has more holes and outs than the sales pitch of a GS CDS trader. (Sorry for THAT disparaging remark–but not much.)

        1. Edward Harrison Post author

          Terry, I think you miss the point about fiat currencies. They derive their value from taxation. If the government is unable to tax to restrain demand when there is a supply-side shock, the currency value goes to zero and you get hyperinflation.

          Inflation is not all demand side or monetary developments. For hyperinflation, there also tends to be supply side “shocks”, both exogenous and endogenous.

          1. Greg

            In fact, try to think of what inflation or hyperinflation would look like in an economy that doesnt use money. Those are the same preconditions for a moneyed economy.

  5. mikefromArlington

    So Faber bases this on a hunch: “that when the time will come and the Fed should increase interest rates, they’ll be very reluctant to do so and so inflation will start to accelerate.”

    Why would they be reluctant? Interest rates are currently at zero.

    I’ve been hearing about hyperinflation now for a year and a half.

    How much of a time frame do these alarmists get? One year from the claim? Two? Ten? Eleventy?

    I claim, 47 years from now, hyper-inflation will destroy fiat currency! Can I sell you some gold now?

    1. ndk

      Can I sell you some gold now?

      As soon as the dollar is widely quoted in grams of gold, I’ll consider gold to be a currency. Until then, I’ll stuff my mattress with USD, which are much fluffier and less cold at night.

    2. cswake

      They would be reluctant to raise rates for three reasons:
      1) U.S. Government debt has an average maturity of 3 years. Interest on the debt could become extremely problematic at 10%+. (From ~350 billion a year currently to ~1.5 trillion @ 10%)
      2) Consumption. People are less likely to take things credit and instead save. Prices of everything goes down. Businesses close.
      3) Mass defaults of indebted business and individuals who are in “teaser rate” loans for all types of assets. More walkaways on houses since their price will drop like a rock if rates go sky high.

    3. MindtheGAAP

      I don’t follow what Faber says too closely, but my understanding is that his view is a bit more nuanced. He believes that the government will keep printing money and ZIRP until there is some sort of recovery in place–whether that recovery is caused by the money printing or by cyclical factors.

      After that happens, the Fed will congratulate itself for a job well done, and it will tighten.

      That tightening causes $h!t to hit the fan, the Fed panics, goes back to loosening policy, and then we hyperinflate.

      That’s my understanding of his view, incidentally, not mine. My current view (I’m not dogmatic about it) is that given the negligible effects all this money has had, deflation is probably in the cards first (taken as a whole–food prices are going to skyrocket, though). Hyperinflation will come, but much later.

      Of course, I also go through Canadian Bank balance sheets and find these people to seriously over-leveraged while the rest of the world calls them paragons of stability and good judgment, so what do I know…

      1. Jessica6

        Some argue that hyperinflation for the US is for all intents and purposes impossible. The heart of the issue is that the US owes its debt in its own currency.

        As for commodities prices, I suspect that credit tightening will actually bring prices down, particularly oil (which will translate into lower inputs such as fertilizer, shipping etc too).

        I fully agree about Canadian banks – it’ll be exposed soon enough as the housing bubble here is just starting to pop.

    4. ray l love


      The Fed will be reluctant to raise rates so as unemployment rates are high.

  6. JO

    Hi Ed, agree with a lot of what you are saying. What I’d like to see is an explanation on what happens when there is a loss of confidence in the currency of the nation running massive deficits and requiring the kindness of foreigners and/or the Fed to step in and buy Bonds to finance the massive deficits. This is the only major inflation risk i see at this time…althought eventually, high inflation i think is likely (2014-2017 ??). I see the strong case for stagflation or deflation, but isn’t a total loss of confidence in the USD $ the only possible catalyst to a short term hyperinflation in the US ?


    1. ndk

      I hear a lot of people talking about the dollar being worthless. I also hear a lot of people talking about their desperation to get out of (USD-denominated) debt and get some (USD-denominated) savings. I see people walking away from their house and home because its (USD-denominated) value has dropped below its (USD-denominated) mortgage. I see people deeply worried about the (USD-denominated) federal deficit.

      The Fed has done a brilliant job scaring people about the longer term value of the USD, but this is little more than so much cognitive dissonance in the wind. People want dollars, and they want them more than ever. The scale of quantitative easing that would be required to snap this is incredibly mind-boggling, orders of magnitude larger than what we’ve done to date.

      1. Greg

        Thank you, thank you, thank you.

        These are my sentiments exactly. All this squawking about not wanting dollars is getting real old. I’ll get real nervous when people start taking me up on my offers to send their dollars to me.

        I asked some guy why he wanted gold instead. He said “Didnt you see its up to over $1200 an ounce??!! When I asked him TWELVE HUNDRED WHATS AN OUNCE ?He got kind of a dumbfounded look on his face.

        People want as many dollars as they can get their hands on

        1. eric anderson

          Yes Greg, gold has gone up from $300 to $1200 because people want as many dollars as they can get their hands on.

          Oil has gone from $20 to $80 (with a speculative trip to $140) because the dollar is king.

          Buffett recently said, “Events in the world over the last few years make me more bearish on all currencies in terms of holding their value over time.”

          Right now, I am in dollars, but that is strategic. I expect lunacy to make those dollars temporarily more valuable. I’m certainly looking for an exit strategy, and it sounds like Buffett is too. (And not only with regard to dollars, but all paper currency.)

          1. Greg

            People are making speculative BETS! Hoping they win and can get MORE dollars!

            They would all $hit their pants if they were actually required to take ownership of all their gold. They’d really shit their pants once they found out how much real gold is available to cover all the buy orders.

            Fools of the highest order. And these are people who claim to understand markets. They are being fleeced by guys like Glen Beck. Run to gold! run to gold!

  7. rn

    I understand loss of productive capacity is a prerequisite for hyperinflation. I am NOT able to view foreign debt obligation as a precondition. I think it is possible to have hyperinflation without any foreign debt obligation. Can you please explain


    1. Edward Harrison Post author

      You need a loss in taxing power, which is the valve to slow down demand. If supply outstrips demand, then you need to increase supply or decrease demand to bring them into balance.

      If people dodge taxes, you lose the ability to control demand. If all of your taxing power goes to foreign obligations, you lose the ability to control demand. The key is a continual upward spiral that is caused by excess demand. If this demand cannot be brought to heel or the supply increased to meet it, you have a problem.

      1. rn

        I think foreign debt obligation is only one possible scenario. Hyperinflation is also possible due to other reasons such wars (even if you win the war), natural calamities such as earth quakes, floods or famine.

      2. Greg

        I think another explanation for why foreign debt seems to play a role in the hyperinflations is that you either need to trash your domestic production by exporting heavily to your creditor to acquire their currency or you need to go to the currency markets and acquire it which becomes a downward spiral for your currency as its value falls. It is costing you more and more of your currency to get their until “they” will no longer sell their currency to you.

  8. Positroll

    Not really a new topic on this blog, cf.

    Here is what I said back then:

    “As a German who was tought that part of history in highschool I was always stunned how that many American economists / journalists could talk about hyperinflation in Germany without acknowledging the historic situation:
    Under the Verasille treaty, Germany lost almost 1/3 of its territory (including some of the most fertile areas) and all its colonies; in addition, the Rhineland – and later the Ruhr area were occupied. Huge reparations had to be paid, in Gold or coal.
    Then in 1921, just before the Ruhrkampf, Germany lost a good junk of Upper Silesia (the other big industrial area of the time besides the Ruhr) to Poland (producing roughly 25% of German coal at the time), despite 60% of the population voting to stay German.
    Despite all that, the German government decided to support the general strike in the Ruhr area by paying the lost wages of more than 2 million workers. Only way to do it: print lot’s of money …
    … it takes extreme circumstances to get to hyperinflation and that the current situation is light-years away from that: After Versailles, Germany was basically still fighting the war, though with economic means, and was (before it finally gave in) ready to ruin its economy in the process.
    In Zimbabwe, the leader is just barking mad and gives a shit about the broader economy, as long as his cronies can still get along and he can “purify” his country from colonialist influeces.
    Simply taking on too much debt only can lead to inflation like in Argentinia, with 10-20% per year as a worst case scenario. Bad enough, but nowhere like Weimar, where in November 1923, US$ 1 bought you more than 4 trillion Marks and people burned the lower denominated bills to heat their houses … (the inflation rate topped at >10 billion %) …
    … A simple budget deficit normally just means that politicians prefer to borrow from the future in order to bribe the voters. That’s what Greece has been doing these last years.
    On the other end of the spectrum, you got a situation like Germany 1922-23 where there was almost nobody left to tax, as the main industrial areas (Ruhr, Rhineland, Saar, Silesia) were lost or occupied (and producing for the French / Poles), the traditional markets (former Austrian Empire) were lost, trade was down, personal fortunes had been mostly destroyed during the war years and nobody willing to give Germany any major loans.”

  9. K Ackermann

    A huge thanks for that video. It worked better than a cup of coffee. I feel so perky that I think I need to smash something.

  10. DownSouth

    ►Ed Harrison: “Austria faced a similar episode of hyperinflation in 1921–2, and no doubt, the searing scars of these experiences deeply informed the thinking of Mises, Hayek, Haberler, Machlup and other leading contributors to the Austrian School in the 20th century.”

    Hannah Arendt put it so eloquently:

    At any rate, the result of the ‘American’ aversion from conceptual thought has been that the interpretation of American history, ever since Tocqueville, succumbed to theories whose roots of experience lay elsewhere, until in our own century this country has shown a deplorable inclination to succumb to and to magnify almost every fad and humbug which the disintegration not of the West but of the European political and social fabric after the First World War has brought into intellectual prominence. The strange magnification and, sometimes, distortion of a host of pseudo-scientific nonsense—-particularly in the social and psychological sciences—-may be due to the fact that these theories, once they had crossed the Atlantic, lost their basis of reality and with it all limitations through common sense. But the reason America has shown such ready receptivity to far-fetched ideas and grotesque notions may simply be that the human mind stands in need of concepts if it is to function at all; hence it will accept almost anything whenever its foremost task, the comprehensive understanding of reality and the coming to terms with is, is in danger of being compromised.
    –Hannah Arendt, On Revolution

    1. Smells Like Chapter 11

      Amazing she said that before Rush Limbaugh, Sarah palin and Jesse jackson

  11. wunsacon

    How much will credit contract? And how much base money will the federal government pour (via fiscal or monetary means) into the hole? They’re throwing a lot in. When does it end?

    I’ve seen a 20%+ bounce in many things (houses, meat, stocks, oil), since March ’09. That’s the layman’s inflation.

    If the stimulus doesn’t end, then that inflation will continue.

    Maybe “it can’t happen”, because we don’t owe our national debt in another currency. But, should I ignore my lying eyes?

  12. ray l love

    The post~ “In fact, productive capacity swamps demand for goods in the U.S.”

    That statement confuses me. The US does ‘not’ have productive capacity that comes even remotely close to that which would “swamp” its demand for goods in a competitive sense. The US consumes well more than it produces now and a disproportionate percentage of that which it does produce, as compared to other nations or to other historical periods, is in the form of services, some of which are of a financial and dubious nature.

    What Marc Faber is suggesting is that nations get into situations that make them vulnerable to hyperinflation due to circumstances outside of their control. The US is very possibly in just such a situation precisely because it lacks sovereign control of its productive capacity… competitively speaking.

    1. ndk

      The US is very possibly in just such a situation precisely because it lacks sovereign control of its productive capacity… competitively speaking.

      Competitively speaking, China doesn’t want hyperinflation in the U.S., and neither does Japan. Saudi Arabia, had it any sovereignty, would not want hyperinflation in the U.S. Our creditors all benefit from deflation in the U.S. in a narrow sense, and to the extent deflation in the U.S. is crippling to the U.S. economy, that serves geopolitical goals too.

      1. ray l love


        By “competitively” I meant to suggest that the US can not produce goods that are competitive with other nations.

    2. alex

      “The US does ‘not’ have productive capacity that comes even remotely close to that which would “swamp” its demand for goods in a competitive sense.”

      Who said “in a competitive sense”? Inflation should lead to a reduction in the real exchange value of the dollar, which would make our productive capacity more competitive.

      1. ray l love


        But the productive capacity needed to meet demand does not exist on US soil. One of the prerequisites listed in this post for hyperinflation is a shortfall regarding supply. If the dollar were to fall in relation to the yuan in the midst of a trade war with China, or if the Chinese were to have labor strikes or whatever, supply shortages in the US are conceivable. The post claims that the US has a productive capacity that “swamps” demand and that claim seems to assume that US manufacturing can be reinstated instantly and without causing a price spike. That seems overly optimistic.

        1. ndk

          I think you make an exceedingly fine and good point here, ray I love. The overinvestment that the U.S. did was in residential housing and commercial RE, and perhaps in some domestic aspects of the service sector. In almost anything tradable, the investment was much less.

          The picture looks really different if you consider the “USD zone”, though. Lots of countries out there do peg their currency to the USD. There are few who doubt the incredible productive capacity of China, or that it indeed can swamp demand.

          This could fool us into thinking the US is in a liquidity trap, when in fact, it’s the USD zone that is in a liquidity trap. The two are incredibly different, and if only the US takes policy actions as if it were in a liquidity trap, the ramifications could be dire.

          Hope I didn’t misinterpret you entirely, but this is an exceedingly important point you’re making.

          1. ray l love


            Naturally, labor and burden costs in the US make it difficult if not impossible for domestic producers to compete with producers in foreign venues, everybody knows that. What has far less publicity though is just how difficult it is to manufacture just about anything in the US on anything other than a large scale. Marx’s prediction regarding economies of scale making it impossible for small operations to compete with larger ones was circumvented to a degree by the reorganizing of production based on the shift to where cost factors were minimized on all fronts other than shipping. This reorganizing period in global manufacturing forced smaller operations to become more specialized and in many cases the smaller companies became component suppliers to larger companies. This process took 30 some years to sort out and left us with a manufacturing base that does not produce goods that are directly consumed or of much value in terms of meeting demand in the event of a shift back toward domestically produced goods. There may not be an option of turning that around without severe cost spikes on least some items, and, if production costs were to rise in Asia for whatever reason it is not a given that Dollar-Zone production levels will meet demand in a timely manner. So, as you suggested (liquidity trap), it is conceivable that money could be thrown at a supply shortage and goods will not necessarily appear as needed, and when they do the cost could be inflationary. (I am of course only addressing one the components required for ‘hyperinflation’, and that is probably enough speculating for one night)

  13. The Rage

    Money supply is tight, has been tight since Volcker. It is one of the ways, along with the general deflation offshoring your economy brings. That is the key behind the great moderation with credit providing the growth surges.

    It is a system the market wanted and they got their wish.

    Inflation? Not possible outside credit inflation and that always collapses at some point. But real inflation? Nope, nada and no. Instead, you would get a deflationary spiral as the economy is shown as gutted and all the credit is drained from the system. Which is why the interventions happen, as capitalists and politicians get scared. The “myth” of printing by the NY FED, uh I mean the Federal Reserve is a joke. Everything, I mean, everything they print is steralized and taken out of the money supply at some point. I am amazed people don’t get that. The current system at the FED is the same system that existed since the early 80’s: tight money supply and loose credit. No more, no less.

    FWIW, the 1970’s inflation was caused by the Boomers coming into their spending years. Since WWII America had used a “keynesian” form of monetary/fiscal response. Loose money supply which allowed the government to tighten credit making sure “bubbles”(ala 19th, early 20th century) couldn’t form. So the economy did well to move the American populace and take advantage of the post-war environment of ultra-growth with the rest of the world down after WWII and the rise of the Soviet bloc. The problem was when the Boomers came into their prime spending years in the late 60’s, their demand began to cause shortages and inflation. Businesses couldn’t keep up with the constant prodding for full employment. It wasn’t to 1980 that signs of businesses able to adjust to the Boomers demand, then the second punch of Volcker’s need to punish inflation expectations, then the “great inflation” ended.

    The fact is, alot of people can’t seem to figure it out, that we are still running a quite frugal system of money supply right now. Instead of government policies trying to get goods into as many peoples hands as possible and expand credit, the policy is to increase the supply of luxery goods and wait to the populace decides to spend into a decreasing prices of moveable goods. This supports overconsumption of the people that have money and under consumption of the people without money. With supposedly the overconsumption of the people with money providing the jobs for the people without money.

    We have been in a general deflation for decades now, with everybody waiting for the credit bubbles to collapse(well at least LANies and post-keynsians) to create the ultimate deflationary spiral. The government can’t support the bubble forever, as the cost of borrowing will negate the “positive” effects of propping the credit bubble. The only way to come down easy from the credit bubble is a domestic investment wave internationally. Who sees that coming?

    Most likely the end result will be American accepting a long period of depression and famine with acceptance that our day as the main hegie is over or National Socialism(The rise of America’s Caesar) and a continuation of empire. Don’t dismiss the latter. After a few years of famine and depression, watching your family members die because you didn’t have money for medical care(I also figure access may be a big problem as well). Your children malnurished and sick. The hatred will rise. Former small businesses completely destroyed by the deflationary wave killing demand. The hatred will rise. Then you see the smug banker, who still has millions even after destruction, the people who has profitted from the depression and politicians who still make a decent living, while you live in a bleak, futureless disutopia. You played by the rules, you didn’t take on any debt, you payed your taxes and worked hard. Yet, here you are. Then a man comes, with a party in hand.

    Then it all makes sense.

    1. MindtheGAAP

      “The only way to come down easy from the credit bubble is a domestic investment wave internationally. Who sees that coming?”

      FWIW, this is exactly what I see coming. I think the problems are going to occur once that domestic investment leaves.

      I’d watch Eurodollar to get an indication of the “real” end, but there may be better indicators out there.

  14. Sticky Feet

    When considering hyperinflation, why do we so often go all the way back to the Weimar Republic, or Zimbabwe? There is a recent example of hyperinflation that may better describe what we in the West could face – the collapse of the Soviet Union. And if you want to talk black swans, as one commenter above, how about considering oil?

    Yegor Gaidar put out some good pieces on how an oil shock devastated the USSR (see here for eg. A key takeaway is that productive capacity that appears abundant one day can rapidly evaporate. You really do have to imagine black swan events.

  15. Patrick

    Faber: not even wrong.

    The risk is all on the side of a long and protracted slump. If sovereign debt get’s to be an issue, the resulting increases in interest rates and taxes, and cuts in gov’t spending will crater the economy. The economic holocaust scenario is debt deflation, not hyperinflation.

  16. mario

    Doesn’t Faber invest in commodities? I usually have a problem with investment manager who is also an analyst and an advisor.

  17. Econophile


    I had to read this 3 times and I am still not sure what you are saying. I will at the outset say that I am an “Austrian ideologue” which I find to be a compliment, but you use it as a pejorative.

    I think you still haven’t grasped Austrian theory and you mischaracterize it for rhetorical purposes. Parenteau’s article correctly describes the “consequences” of money expansion which you seem to think are causes of hyperinflation (rapidly accelerating inflation, a collapsing foreign exchange rate and, eventually, a widespread disorientation and disruption of productive activity).

    If “the foreign currency obligations” had anything to do with causing hyperinflation then since we have large foreign currency obligations (China, Japan) we should also be hyperinflationary.

    Oh, yes we need loss of production too. Well, post WWII Germany lost all of its productive capacity and it didn’t have hyperinflation. It also had large foreign currency denominated obligations post-War. They also had a tight money policy and Ludwig Erhard’s free market policies and somehow they became the most productive economy. Recall that France received the most Marshall Plan money.

    So, what are you saying? If we open the printing presses up and don’t have loss of production or foreign obligations we won’t have inflation-hyperinflation?

    In fact there is only one constant in inflation and that is money supply and the demand for it. In Zimbabwe they were carting around armfuls of currency to buy bread. Pretty soon no one wanted currency and the demand for it collapsed since it wasn’t useful for exchange. The fact that Mugabe trashed the economy for political purposes had nothing directly to do with inflation there. If you have a stable currency and you seize the means of production and the government borrows a lot of money because it spends more than it taxes, then you end up with Greece and economic collapse. But not from hyperinflation.

    The problem with Faber is that he has been predicting hyperinflation too often and while you point out he gets an audience, he has been wrong.

    The only reason we would have hyperinflation here is if Ben opens the money sluices without regard to the laws of economics. He is a Monetarist so I don’t think the Fed will do that. We could have high inflation in order to bail out the government by paying for its debt in devalued dollars. But, assuming inflation got to, say 20%, look for price and wage controls (a logical Keynesian response) as a temporary fix while they jack up interest rates to control supply.

    1. Greg

      The US govt has NO foreign currency debt obligations to Japan and China.

      We owe them $US and that is it. I stopped reading your comment after I got to here.

      1. cswake

        Greg, while Econophile misspoke about that matter, he is generally correct about the foreign currency obligations. Why?

        Average maturity of U.S. treasuries is 3 years. In any crisis of confidence in the Dollar or the debt of the U.S. Government, we will begin to reissue Carter Bonds, or whatever equivalent thereof. It’ll take a few years, but foreign-denominated debt will come and that’s when the hyperinflation scenario starts to unfold. I think they’ll be denominated in SDRs, but who knows…

        1. bob

          “Average maturity of U.S. treasuries is 3 years.”

          I’m very interested in a source for this figure. How about the median? Either number only serves to simplify matters to absurdity.

          I don’t think that the maturity is that short, I have figures to back it up, but if it were it’s because of a choice by the fed/treasury to make short term debt available for the rest of the world to park in. It’s part of the responsibility of having the reserve currency of the world.

          Supply and demand. If the supply were not available on the short end, then rates would go negative, again.

          The flexibility of the fed/treasury in allowing this speaks to your argument about a loss of confidence. There would be a major loss of confidence if they didn’t issue enough short term debt to satisfy the foreigners looking to run from home. Buying t-bills with a negative yield? Only banks do that.

          As a citizen I don’t agree with most of what the fed/treasury has done, but this is why it was done.

          1. cswake

            I was running off my head – it looks like we stand at 57 months for average maturity, not quite 5 years. No mention of the median.


            With everything happening on the Euro, I imagine this will be dropping again.

            The point was not to identify the causes on why this situation exists or if it was justified, but rather to show that the U.S. can quickly find itself at the mercy of interest rates and rolling over into foreign-denominated debt once the “contagion” spreads here and the Federal Reserve is no longer in control. (As it did during Carter, but this time around the U.S. isn’t in the same position of being mostly debt-free.)

          2. cswake

            By the way, if you’re interested, one of the fascinating events during the dollar crisis during Carter’s administration was that oil, or more specifically the dependence on it, was blamed for a majority of the dollar’s weakness.

            See first paragraph here:

            The Department of Energy was supposed to decrease our reliance on oil so that this wouldn’t happen again. Since we’ve only grown more dependent, I’m betting we’ll be hearing more comments like this when the dollar crisis comes again (second paragraph, same page of the same article above):

            “The urgency for action on the energy program becomes clearer all the time. Brandishing the oil weapon in Belgrade, Saudi Arabia’s Finance Minister Mohammed Ali Abdul Khail warned that continued depreciation of the dollars that the OPEC countries are paid for their oil might very well “evoke reactions.” By that he presumably meant that the OPEC countries might force buyers to pay in a “basket” of many currencies rather than just in dollars; if this were to happen, demand for dollars would decline and they would slide further in value.”

          3. bob

            “but rather to show that the U.S. can quickly find itself at the mercy of interest rates and rolling over into foreign-denominated debt once the “contagion” spreads here and the Federal Reserve is no longer in control.”

            The federal reserve, in cooperation with the treasury just demonstrated that they are in control, complete and total control, responsible to no one.

            As far as banks go, that’s what everyone looks for when the SHTF.

            Honestly, where else are you going to go? China, with capital controls already in place? EUR? Their banks/governments are in trouble due to US$ denominated debt. The IMF? They might have trouble getting money from the US and EUR under that scenario.

          4. cswake

            “The federal reserve, in cooperation with the treasury just demonstrated that they are in control, complete and total control, responsible to no one.”

            I agree – the 70s showed that the Fed is only responsible and accountable to the markets. The ECB is finding this out quickly.

            If you read through that ’79 Time article, it was a worldwide effort by Central Bankers and governments to prop-up the dollar. I think they bought time for the dollar system, and it has been slowly gaining momentum to its eventual demise ever since.

            “Honestly, where else are you going to go? China, with capital controls already in place? EUR? Their banks/governments are in trouble due to US$ denominated debt. The IMF? They might have trouble getting money from the US and EUR under that scenario.”

            Excellent questions, I don’t know.

          5. eric anderson

            bob, I don’t know what the average maturity is. But Zero Hedge reported this within the past couple of days:

            “In April, the Treasury issued a net of $176 billion in total debt… The final Bill redemption balance in April was a paltry $596 billion, or $675 including Bonds. Let us repeat: in April the US Treasury had to roll over two thirds of a trillion in debt.”

            Having to raise that much money in one month indicates an awful lot of short term stuff to me. And could put us in deep doo-doo very quickly if confidence is lost in the “world’s reserve currency.”

            How can this be anything but a precarious position?

          6. cswake

            The Fed is in control until it isn’t. A confidence loss in the dollar won’t have the same result as last time around.

          7. bob

            Eric and cswake,

            One day aliens might show up and offer a reserve currency. That does not change the post, or the conclusions of the post, at this time.

            To put this another way, all of your arguments are “what if’s”. There are thousands of “what if’s”, and thousands more that are yet to be imagined. Each of those millions of “what if’s” have thousands of possible outcomes. This is imagination land. Bankers don’t live in imagination land.

            Your time is better spent reading and understand the post, not objecting to it. It’s based on history and observed data, all we as humans really have. If you can think of anything that he has written that is wrong or that you can demonstrate to be incorrect, please point that out.

            Eric points out a ZH piece and says “wow, that’s a lot of money”, compared to what?

            Cswake produces a Time piece from the 1970’s to show…What exactly? How does that piece challenge the conclusions of the post?

        2. Jeff65

          US Treasury maturities are irrelevant to the problem. Why? Because the US doesn’t need to issue treasuries in order to fund govt spending. It doesn’t need tax revenues either.

          The only scenario where the US govt might enter into a foreign denominated debt agreement is to buy oil and even that would be treasonous.

          1. cswake

            “The only scenario where the US govt might enter into a foreign denominated debt agreement is to buy oil and even that would be treasonous.”

            I guess the Carter Administration, Volcker, and a lot of other people need to be indicted because that’s exactly what Carter Bonds were.

          2. Jeff65


            There was (and there remains) no need for the USG to issue foreign denominated bonds even if the actors at the time were mistakenly convinced otherwise.

          3. cswake

            I’ll respectfully disagree that it was optional. Our disagreement will be solved once the dollar crisis comes here. :)

          4. Jeff65

            The USG can’t be forced to issue ANY debt in ANY currency including its own any more than you can be forced into signing a contract you don’t wish to sign. It might face some hard choices but there are always options.

      2. Econophile

        Greg: You are absolutely right and I was wrong, but not confused. In my haste to come to a quick conclusion I admit I didn’t read Ed’s article as carefully as I should have. Our debt is dollar denominated. Yet I still stick to my general point.

        1. Greg

          Alright then………………….I’ll finish your post ; )

          I really do think the Austrians fear of opening up the printing presses is waaaay overblown. We are talking about a country that has a lot of economists that have folllowed history closely, have important peoples ears in policy situations and our form of govt has a natural check and balance nature to it. 1920s Germany ZImbabwe and Russia (someone brought up earlier) were not healthy democracies (ours is a little under the weather now…. but). Some inflation will be good. ( I still doubt we will see that for a while) and as long as we address the energy issue I dont see a potential source for cost push inflation.

    2. Edward Harrison Post author

      I am an Austrian ideologue, but perhaps just not as ideological as you. So I am not pejorative about Austrian economics. You misread me if you believe that.

      Here are a few thoughts:

      We Austrians have problems with money printing not because it causes hyperinflation but because it misallocates resources by benefitting those who receive the money first at the expense of those who receive it later. A bank that receives $100 printed out of thin air gets to buy real resources with that money before the effects of the increased money supply are felt in asset prices or consumer prices. This is a distortion that has negative consequences in boosting investment in some sectors at the expense of others.

      What about interest rates? Since I don’t like the Fed manipulating interest rates, I feel uneasy about what I am going to say but, unfortunately it’s true in a fiat world. If interest rates at any point on the curve crept up too far, the Fed could ALWAYS buy all the debt at that maturity and push interest rates back down. The fact is we have fiat currency which is simply a commitment to repay with more of the same. It has no value except through the coercive power of the state to force us to use it as currency and pay taxes. So, the concept that we are beholden to foreigners for debt, that Beijing is Washington’s banker is false.

      Moreover, on a similar line regarding hyperinflation, if the US printed dollars tomorrow and expunged its entire debt stock, the result would be a one time drop in the value of the dollar vis-a-vis foreign currencies and hard assets. A one time rise in the price level does not hyperinflation make. Hyperinflation is persistent and accelerating inflation that occurs because of the persistent need to buy assets/pay debts denominated in a currency you can’t create.

      All I am saying is that we are in a fiat currency world in which money really has no value except through the state’s taxation authority and the acceptance of that currency as money. That gives the government a hell of a lot of latitude, constrained only by a refusal or inability of citizens to pay taxes or by external debts not in its domestic currency. That’s fiat money and it is a heck of a lot different than the gold standard.

      1. Econophile


        Thank you for your thoughtful reply. I have gone back and re-read your article, but I don’t think my main criticisms have changed.

        I’m not trying to be overly critical here, and I appreciate that you do have some knowledge of Austrian theory. But I question the consistency of your ideology since the Great Panic of ’08. (*I’ll explain this below).

        I was rather surprised when you jettisoned your Austrian ideals for intervention after the collapse of Lehman because you feared global financial meltdown. I was even more surprised when you gave credibility to MMT. At that point I sort of tuned you out, and I don’t mean to be disrespectful here.

        MMT is just another statist approach to money that was thoroughly discredited (though not eliminated) by the early Austrians. As a student of Austrian theory you are well aware of that. That you should give Auerback credibility for advocating MMT is surprising. I will admit I had a difficult time from the article determining if you were actually supporting MMT or Austrian theory, or both. Sorry, but you confused me. I also re-read your piece on Separating Economics From Politics and still don’t know where you stand. Perhaps you want to have it both ways.

        This is not necessarily the forum for arguing with you on theory but … I still believe from your waffling that you need to do a bit more reading about Austrian theory. Again, I don’t mean to be disrespectful, but you either have to accept the conclusions of the Austrian School or accept the Positivist School, since they are mutualy exclusive (the Methodenstreit and all that). You know as well as I do that Auerback’s statement that a ‘wise government through fiscal policy through fiat money (inflation) can generate full employment and price stability’ is bunk. If they could they would and they haven’t ever done so yet in history.

        *Back to the Great Panic of ’08. The Bush Administration, Paulson and Bernanke panicked and that led to the bailouts and all of that largesse to Wall Street. I believe, and I am working on an article on this for The Daily Capitalist, that (1.) They confused “Wall Street” with “the economy” and (2.) Most of what they feared would happen, happened anyway. I would put you in the panic group because you favored intervention.

        I admit to being a doctrinaire Austrian but, like you, I try to think things through. I don’t think we’ll have hyperinflation but I agree we will have inflation once the bad debt is cleared out of the banks. I just don’t believe the criteria Auerback sets up has much to do with the economics of hyperinflation, but rather are political criteria. As an Austrian you know where I stand on money and credit.

        1. Edward Harrison Post author

          You are right, Econophile. I AM trying to have it both ways. I think this is where you have problems. I just don’t accept the extreme versions of Austrian economic theory even having read it. It’s not that I haven’t read it as you suggest. Rather, that I don’t find it compelling – at a minimum from a political perspective. But that is a debate for another time.

          What I am trying to do here is frame the question of hyperinflation which is bandied about in a ridiculous way. Having looked at the facts, you and I agree that the US monetary policy is distortionary and inflationary but that it is unlikely to lead to hyperinflation.

          For me, the purpose of the post is to strip away the ideology and look at what is likely economically from the mechanics of the issue. Hyperinflation occurs only under specific circumstances which I outlined.

          I am sure Marshall would agree this is true with a very big caveat, namely that this inflation can be held in check down the line via taxation, which of course is true. The question regarding tax, however, is where the politics come into play. Do we want the state using tax and fiscal policy in this way? I say no as do you. Marshall says yes.

          Where I am having it both ways and undecided has to do with fiat money and state intervention (both political issues I should point out). We live in a fiat currency world and those who are talking about hyperinflation often don’t understand how that world is different from the pre-1971 world. The MMT people have done the best job of explaining this and that’s why I am explaining their ideas. However, I am deeply ambivalent about fiat money because, unlike Marshall, I do think artificial constraints on deficit spending are necessary (something I may go into later).

          Econophile, I appreciate the tone of your response and I look forward to hearing your pushback. That’s the purpose of these posts. My hope is that people can put down the ideology for a second and run through the mechanics.

          1. Econophile

            “For me, the purpose of the post is to strip away the ideology and look at what is likely economically from the mechanics of the issue.”

            Ed, how do you do that? Economic analysis is based on ideology, or, to use a better word, “theory.” How can you analyze anything without a theoretical framework. You more than anyone understands that what passes for “common sense” is mostly economic ignorance. It’s not always so simple to look at data and come to conclusions. Confirmation biases and all the other econometric claptrap.

            Ed, again, I suggest you re-read Hayek’s and Mises’s work on epistemology. If you can refute their brilliant work on this, then I will agree with you.

            There have been many hyperinflations in the modern world. Some of them have been mentioned in the comments. The only common thread is printing money. I believe Doug French at may have done some work on this. There are a lot of political reasons why governments inflate, but “why” is not as important as “how.” Until governments understand economics, they will repeat the mistakes of history.

            With humble apologies my friend, you appear to be confused.

  18. abelenkpe

    I can’t see hyper inflation happening if wages don’t increase. Wages have been stagnant and many are actually falling as companies and states cut back.
    All the new money in the world doesn’t mean anything if it doesn’t get into the hands of consumers and workers.
    We already had inflation, ten years of easy credit that created the boom. Every government in the world wants those days back again, but all their efforts are failing because it isn’t about theory or economic models. When workers don’t have work and the little work they do have is barely enough to get by the entire system decays. It is and always will be about jobs.

    1. scraping_by

      Actually, if you want hyperinflation, look a little closer to home. Electricity in California hyperinflated back in 2000 and 2001.

      I don’t recall any large tidal wave of cash entering the state that started chasing power. I remember a handful of operatives in Houston arranging for a monopoly position in supply and using it to drive the wholesale price form $45 to $1400. Something like early OPEC, or the price of gas when the US refinery capacity dropped to five installations.

      The inflation of the 70’s started when Nixon sold half our wheat harvest overseas, didn’t make nice with the house of Saud, then took the dollar off the gold standard. The Nixon shock echoed for ten years.

      The idea that all inflation is caused by demand side overbalance of cash is bogus. Try to figure out what Milton was smirking about.

  19. GaryD

    The Roman Empire had massive inflation with no foreign-currency-denominated debt and an absolutely monopoly on the creation of money. They probably suffered from the same kind of deadly arrogance that we suffer from now!

  20. steelhead23

    Edward, I agree, hyperinflation is not currently possible or very likely in the near future. But, let’s talk about what is possible, perhaps even likely as a result of the credit crunch and its offspring – sovereign response. Remember September 2008? Remember what happened to interbank lending? Could that happen again? If so, how?

    I have come to recognize that I am in serious danger of becoming a perma-bear. Not so much because I have a pessimistic attitude, but because the direction I see the system going is so darn bad. Let’s see, we had a series of interbank transactions designed to leave some sucker with a hot potato while enriching the ‘Smartest boyz in the Room’. It blew up Bear Stearns, Lehman, AIG, and Fannie and Freddie. It would have blown the whole system to smithereens but the sovereigns stepped in and performed shotgun weddings and bailouts to get the machine working again. Then, to fix things in the larger economy, gov’ts borrowed a bunch more money to keep things going. So, over a period of 2 years and change the U.S. federal debt rose by 20%. Fine, fine, we have enough economic power to cover that. But now, we have a 12 T debt, we continue to have banks operating under the Blankfein rule (Steal all you can. We’re doing God’s work.) And we have a gov that is owned by the banks. How in blazes do we go from here to where we (We the People) want to be? A world in which banks make modest profits and provide a real service to customers as opposed to attempting to bamboozle us? How do we obtain a government that works for us, instead of the banksters (OK Ed, I know you’re an economist, not a miracle worker). My greatest economic fear is not hyperinflation, it is uncertainty – or if you prefer, risk. That risk is not hyperinflation per se, but it might be manifest that way. The risk I see is simply this. There is a real moral hazard in the falacies I point out above. If the banksters are not chastized, what confidence should I have that they will not dream up other ways, new ways, to skin me. Let me throw something simple at you. The S&P has gone up 70+% since March 09, mostly due to prop buying by the big banks using cheap money from the Fed. So now, tout TV is calling me a fool for sitting on my cash since early 08. I would dearly love to invest in a system which would beat inflation by a couple of percent – like AAA bonds, munis and the like, perhaps even a mutual fund or two. But as soon as I start to think about this, Lloyd’s face infests my brain. I see him rubbing his hands as the rube enters his casino. My bottom line question is this, how the heck am I ever going to get comfortable investing when the system simply won’t clear the crooks out? Simply put, Lloyd Blankfein and his ilk are a far greater threat to my future than Osama bin Laden ever was – yet they do not have to live in caves and aren’t pursued by predator drones. It isn’t the rules of economics I’m confused about, its the rule of law.

  21. Andrew not the Saint

    Everybody’s scared of the Godzilla massive inflation, but the fact that even a 10-20% inflation can wreak considerable havoc on an already weak economy seems to escape almost everyone.

    One may ask – what’s so wrong with 20%, the interest rates will go up to around 25% and the problem is solved? Wrong. No government taxes take into account this kind of inflation, which means that everyone would be heavily overtaxes until the government starts changing the tax rates laws couple of months… This would push a good deal of every-day activities into the black economy, just to avoid taxes, which will only further increase the deficits, decrease the productivity and motivate the govt to print more money, producing a vicious cycle of ever increasing inflation.

    1. Edward Harrison Post author

      Andrew, I think that’s where I am on this one too. You don’t need hyperinflation to feel the negative effects of inflation.

      If my company has revenue of $1000, makes $100 that is worth $80 a year from now and is taxed at 40%, my effective tax rate becomes 52%. What about accounting for inventories:

      “In an inflationary environment, the LIFO method will result in a higher cost of goods sold figure and one that more accurately matches the sales dollars recorded at current dollars. ”

      Then there is the leveraged and speculative borrowing encouraged by inflation that creates malinvestment.

      Hyperinflation is a canard. But, you don’t need hyperinflation for inflation’s pernicious effects to be felt.

      1. cswake

        IFRS abandons LIFO inventories. I believe all large U.S. corporations should be converted by 2014.

  22. Evelyn Sinclair

    OK — Some of the inflation that affects us the most is caused “artificially” and at least somewhat removed from a direct link to “money supply.”

    Gas is $3.00 + a gallon, about 3 times what it was when the CheneyBush administration came in and began making war in the Middle East. I have seen pretty convincing charts that show every time there’s been war in the Middle East, the price of oil goes up. (Let me know if you want a link.)

    Beyond that, there’s the commodities market. People can make bubbles in commodity prices, which means food and fuel, just like they can make bubbles in stocks or other markets.

    But this is only one step removed from an “easy money” policy of the Fed that feeds bubbles in general, and the punishing of savers by making their money worthless from a time standpoint — banks don’t pay interest — and forcing money to either erode or seek some return by risky speculation.

    Food prices are up both because of commodities traders driving up the price of food directly and because the price of oil is high; food production depends on oil for fertilizer and transportation.

    The less money people have the more important food and gasoline prices are.

    I have a “pita bread” watch. Local stores I buy at have all gone from under a dollar to well over a dollar for a bag of fresh pita bread, over the last couple of years.

    CREEPING INFLATION slowly but surely is eating our lunch. Literally!

  23. Doc at the Radar Station

    I think Hyman Minksy and his ideas about economic memories are what is most important. We had “modest” inflation in the 40s, 50s, and 60s because we were so scared of deflation IMO. We weren’t going to let THAT happen again! Then when the 70s came and inflation got out of control then it was what had to be *WIP*ed. When it was finally whipped in the 80s, then it was the next thing that was remembered in a negative way, and we weren’t going to let THAT happen again! Now we are just repeating history with a deflationary cycle. When we’ve had enough of deflation, then we will do what we can to prevent it again, but not until it’s done serious damage. So, what’s going to lead us into GFC Part II and the deflationary abyss is the old memories of bad inflation. When we’ve had enough pain, we will try to inflate again a la 1933. In essence, our economic beliefs and expectations are more powerful than anything else. It trumps everything.

  24. MiquelitoRaton

    Fractional reserve lending by banks increases money supply substantially. The increase in M1 (notes/digits in accounts) is one thing, but lending is a huge multiplier on that. That defines the true money supply. At some point this will kick in.

    Then we need velocity of money to kick in. Panic can accelerate this, as the people fear that the value of their dollars will go to zero (e.g. weimar or argentina) so they spend it quickly. This can be “event” driven.

    I disagree with the requirement of debts in foreign currencies. Huge foreign held debts in our currency provides a huge temptation to wipe the slate clean.

    At this point the Fed is looking more and more like the sole buyer of new treasuries. How long can this go on? Will there be a failed bond offering? Will the EU/UK crater creating a contagion? Nuclear war in the middle east? There are many potential events to trigger panic. If the foreign investors dump their treasuries or the bond vigilantes force up interest rates, those could trigger a panic.

    In the end, the fiat system relies on trust. If trust is lost, panic can ensue. At some point the government gets to the point where they owe so much in entitlements + debt service (which will rise with rates) that the government is faced with no option but to print/inflate…just a enough, say 10%. Then people lose faith and start spending to capture value for their dollars, velocity grows, and it runs away from the government. How do they put the genie back in the bottle?

    So the dynamics are different this time, but the government may lose control and find themselves with no other option but to inflate. In that case, do it quickly, wipe the debt clean and start over. There will be pain either way.

    1. Jeff65

      >At some point this will kick in.At this point the Fed is looking more and more like the sole buyer of new treasuries. How long can this go on? Will there be a failed bond offering? Will the EU/UK crater creating a contagion? Nuclear war in the middle east? There are many potential events to trigger panic. If the foreign investors dump their treasuries or the bond vigilantes force up interest rates, those could trigger a panic. In the end, the fiat system relies on trust. If trust is lost, panic can ensue.<

      This is wrong. The fiat system relies on the govts ability to enforce taxation, not for its own spending purposes, but to create demand for the currency.

      1. Edward Harrison Post author

        Jeff is exactly right. “The fiat system relies on the govts ability to enforce taxation, not for its own spending purposes, but to create demand for the currency.”

        The government could make an electronic credit to pay a debt anytime it wanted to. It doesn’t need taxes to do so.

        Here’s the question, though, Jeff. What would cause citizens to lose faith in the currency and resist taxation? I would argue, we are a long way off from this but eventually that is the real threat (of which Faber speaks).

        1. Jeff65

          >What would cause citizens to lose faith in the currency and resist taxation?<

          A perception of the lack of ability to enforce taxation?

          Illegitimacy of the government?

          Being misled into fearing that deficits are leading us to economic oblivion? :)

          I believe that at the moment any resistance to taxation is most likely to happen due to misplaced fears rather than a real threat.

          1. Anarchy

            Maybe because the government has too much debt, that it can’t pay off? Taxation forces people who use the money (fiat) collateral debt literally. USA already has the highest taxes if you account local, state, and federal taxes. Taxes also creates bad incentives as well. Such as employment being outsourced, as well as production, including regulations, so the end result is that those who (americans) pay taxes to legitimize the US dollar (fiat currency), eventually get hurt with good jobs going abroad. Ironic isn’t it? Likewise tax cuts can create more profitability, and pave paths accordingly, times not always good. Taxation is distortionary, and indeed a regulation.

          2. Greg


            “USA already has the highest taxes if you account local, state, and federal taxes. Taxes also creates bad incentives as well.”

            If this is true (which according to every conseravtive I hear Obama going to raise taxes to make us more like Europe, so which is it are less taxed or more taxed than Europe? ) then how do our explain our highest standard of living on the planet??

            Its always curious that tax breaks, which will lead to more spending are not a concern for driving prices up ( now at this moment I support a lowering of taxes) for most conservatives. Its like they think a govt dollar has more spending power or something.

        2. bobbyp

          Here’s the question, though… what would cause citizens to lose faith in the currency and resist taxation?

          A total rejection of the government as sovereign. You see this in revolutionary times. You will also commonly observe inflationary pressure as the populace is deprived of currency to pay their taxes. A paradox, no?

          I would argue, we are a long way off from this

          Then why is it a concern? We are a long way off from the sun expanding and burning the earth to a crisp. This will end life…totally. For some reason, I don’t see a lot of concern about this existential threat.

          <i….but eventually that is the real threat

          Sorry. That is pure balony. I cannot take seriously the argument that this is a “real threat” because you assert it is a “real threat”.

          Do keep up the good work! Thank you.

  25. Jeff65

    Money has two functions that are always at cross purposes:

    > Money facilitates trade
    > Money is a store of value

    It can’t always be both. Dilution of the existing supply is sometimes needed to grease the wheels of trade. This can lead to inflation, but it is necessary that it be so.

    If no such dilution were possible, the govt would have to engage in redistributive tax policy to an even larger degree than it it already does. It is a very simple principle: the game must end when one person at the table has all of the chips.

    Inflation can be viewed as a result of the failure to tax appropriately.

  26. Melrose

    @ Ed Harrison

    I can only assume that you read Baseline, EconomistsView etc.

    your statement “But, this is ideology – not economics.” could not be more true, Many economists, particularly in the blogosphere, names like Johnson, Kwak, Thoma, DeLong etc. overtly and covertly inject ideology into their arguments.

    Unlike the names mentioned above,Faber plays with real money and is anything but covert about his ideology.

  27. bobbyp

    Well said, Mr. Harrison. However, I was somewhat taken aback by your conclusion, and the fear expressed regarding inflation. What about the dangers and costs of deflation? What is the cost to society of millions of unemployed? The poverty of the upbringing of their offspring? The foregone investment opportunities left behind due to lack of demand…the paths not taken? It’s as if you assume these costs to be trivial. I certainly hope not, and I really think better of you that you do not share the ruinous and heartless unthinking fear of inflation shared by deficit hawks, grinches, bankers (who are, correct me if I am wrong, a distinct minority), and loan sharks.

    MMT does not posit unlimited deficit spending as a cure for anything. Nor do its advocates favor hyperinflation. Proponents seek to place the government’s spending decisions in the context of demand and underutilized resources. This is where the debate belongs….a political debate, not whether or not some fat cat bondholders will piss their pants and wreak social destruction by hysterically selling off their T-bills. Deficit hawks seek to delegitimize their opponents by defining the terms of the debate as “economic common sense”. They are, to put it charitably, being disingenuous.

    1. Edward Harrison Post author

      bobbyp, I agree that deflation is what we should be more worried about at present (given the sovereign risks in Greece and the eurozone). If we double-dip, you are right, it would be a depression of untold severity. The result would REALLY be fascism then in one country or another.

  28. Sy Krass

    Again people, why is this so hard? We WOULD be in a deflation right now BUT there is so much stimulus, QE, etc, that we didn’t slip into it. We WILL have some sort of inflation because the FED CAN’T tihten because they’ll crash the economy as soon as they do. Anybody hear of Interest Rate Swaps?

  29. Wolf 10

    A long time ago I took a basic college course in economics and over the last few years, as a retiree dependent upon savings, I’ve felt the need to educate myself as to the workings of financial markets. Lately this has been a thoroughly infuriating process. So much so that I am very much on the same page as Bill Maher when recently he (jokingly?) asked , “Why have no bankers been shot?”

    Much of what I read in this blog is over my head. While I have no respect for the disdain of complexity such as is displayed by the likes of a Palin, I do admit to taking comfort in Elizabeth Warren’s suspicion of unwarranted and deceptive complexity that has until recently passed for innovation in our financial system.

    But I have from the start digressed. At the risk of dating myself I simply must declare that I believe I grokked the above and am somewhat reassured by it. As a side benefit, I am also quite pleased with myself.

    It appears that as a nation we have room to run in the direction of more social democratic redistribution and it is only our thinking that makes it seem otherwise.

    1. Sticky Feet

      you may be on the right thought. most people have not benefited from any economic growth for a long time – longer work hours, not much exrtra pay, etc., – the social contract is broken. while this may not augur in resistance from the populace now, there will be a tipping point… (it should have come earlier)

  30. Septeus7

    The cause of hyperinflation seems simple to me because the value of money is determined by what useful goods and services it can purchase.

    Since that is true then if the countries’ ability to produce goods and services that people want declines then price of the money declines with the decrease in demand and therefore you get inflation.

    Hyperinflation happens after a collapse in production and the response by the central bank is to increase the money supply but the money is spent on debt obligations or speculation rather on making increases in the production that economy really needs then hyperinflation happens because the banks are constantly increasing the amount of money but with a more and rapid decease in that money can be used for.

    The situation now is that because the dollar is still the reserve currency and everyone depends on the dollar system even though American aren’t producing physical goods and services people that people want they can’t stop purchasing dollars because that would destroy them as well.

    So the world is in impossible situation where if other countries unplug from the dollar then the US gets hyperinflation and they deflate because of the dollar denominated debt they purchased is worth less and less or the world can keep going as is and the US deflates and the rest of world faces stagflation.

    If the foreign economies continue to buy US debt and it can’t increase production in ways that will result in returns for investors and the US can’t because credit is locked up in worthless toxic “assets” or being used by government to “secure” these toxic assets then whenever “investors” (like German Banks) by American debt they are removing money that could be used in their own economies in exchange an asset that only gains if their currencies lose value so they inflate and become less productive and therefore austerity programs and other economic attacks must launched in order to keep the global system going so the rest of the world must get poorer slow quicker so that the US can get poorer slower.

    It’s called “Beggar thy Neighbor.”

    1. ray l love


      Or, looking at things from the opposite view, it might be called: Triffin Dilemma (or is it Triffen?)

  31. joebhed

    Thanks, Ed.
    Let’s all agree what this post does.
    It uses Marshall Auerbach’s presentation as a basis for eliminating the rhetoric of the MisesBlogists and other Austrian-types (with all due respects for the entire Libertarian spectrum of economic thought) that deficit spending, as actually proposed in MMT, will lead to hyperinflation like Weimar or Zimbabwe.
    That’s all for now, folks. Can’t happen.
    In fact, deflation is the more worrisome phenomena, and at the same time it is the CAUSE for the call for deficit spending.
    So, where does that lead us?
    Hopefully, into a rational discussion of whether we can balance our fiscal actions to oppose deflation with a healthy concern for the possibility of even mild inflation.
    Now, in that regard, may I throw in one major point for consideration.
    Dr. Bill Mitchell has said on a number of occasions that it is NOT necessary for governments operating in a fiat system such as we in the US to BORROW the monies that are deficit spent.
    These “Balances Formerly Known As Deficits” can simply be spent into existence using the budgeting process just as soon as we throw off some of the leftover gold-standard fiscal and monetary shackles that the MMT-ers call “self-imposed constraints” against our monetary sovereignty.
    Just a thought for further discussion, Ed.

  32. Anarchy

    Marc Faber statement isn’t far fetched. There is a reason why T-Notes, and T-Bills are preferred among lenders. In light of Auerbach’s claim that the USA can spend as much money as it wants, because it borrows in it’s own sovereign currency, which he said in the past, it depends on the eagerness of the lender. What happens when lenders refuse to lend? High interest rates to attract them? If that doesn’t happen, what then? The Federal Reserve will buy the treasuries which will considerably debase the dollar, which is the road to hyperinflation, at least high inflation. As far as demand, and supply in inflation, this is nonsense as seen in the 1970’s with high energy prices. There wasn’t more demand for oil in stagflation of the 1970’s, and the same goes for food. Inflation hits food, doesn’t mean it’s because more people are eating more food. Supply, and demand has it’s own price fluctuations outside of monetary. There is inflation in the money supply, or is there inflation in prices? Which is it? Various factors effect food. Inflation in money supply debases it’s value. If by mainstream definition of inflation, you could argue health care is a indicator of inflation in the USA. More sharp analysis would show that is oversimplifying the issue.

    1. Greg

      Thing is anarchy, no one needs to buy the treasuries. We make rules that debt is to be sold $4$ with our spending but it is not an operational need. Problem with all these “borrowing” stories is they leave out the fact that the spending has already happened before any treasuries are “sold”. We dont have the fed/treasury standing out there saying “OK we NEED 300 billion will anyone loan it for 10 yrs at 3%” . What happens (in real life) is the fed/treas spends 300 billion and then says ” alright we have 300 billion for sale at 10yrs and 2.75%, who wants it?” When they are in a good mood and the economy is cruising they might then increase the interest til they find buyers. When the economy is on the rocks and they are not in a good mood Its” take it or leave it and we’ll buy it”

  33. Jon

    Another aspect of both historical examples is that there were significant segments of society which the governments were determined to shield from the effects of their policies. The Wiemar government continued to pay the workers in the Rhineland who went on strike to protest the French occupation. In Zimbabwe, the government has attempted to maintain military pay at inflation adjusted levels. This adds a demand factor to the supply/demand balance that will not be destroyed by the hyperinflation until the government is no longer able to maintain this support.
    One might think that support for the financial sector here in the U.S. might provide this aspect of the hyperinflation picture However, money pumped into the financial sector does not lead to increased demand. If anything, it causes the opposite, as we have recently seen.

    1. Anarchy

      No the financial sector are simply just diversifying, and become trading companies, and still under a “deflated” state. Low interest rates makes their activities more profitable just like in the housing bubble. Just because you are getting more money, doesn’t mean you are creating more demand. This ignores competition, and bidding prices lower to attract consumers. Consumers are always looking for cheap prices to maximize their purchasing power. To suggest that inflation in money supply creates more demand by which consumers go on a shopping free, and bid prices up is not believable as wages stay stagnant. Stimulus money to a consumer doesn’t necessarily create high demand. This is proven in recent past. Consumers look for good deals, and cheap prices. Again value of money vs supply/demand. Which is it?

  34. ram chandar

    ok, this is kind of difficult to grasp but anyone who knows economics well here please tell me if abba lerner is right or wrong. i mean just because abba lerner says so, does not mean its right? govt does not really need to tax inorder to spend? who is this abba lerner? and tax is only to decrease the aggregate demand? or maybe its lerner’s way to look at things. i guess you can either look at a elephant from behind and say that elephant is a big ass with little tail or from the front and say elephant is a big head with an enormous nose.

    1. Greg

      Think of it this way ram.

      I discover my own country with a few thousand of my friends and we pick someone to be treasury and issue our own new currency. We do this so we dont have to “borrow” any one elses currency and we dont peg it to gold so we dont have to acquire gold to keep in our vaults. We just call them bucks. In order to start using these bucks we have to issue them first and tax after. We agree a tax is needed to encourage the work necessary to acquire the bucks.

      So in any fiat system taxation comes after issuance. Down the road a while, it might look like taxation is funding expenditures especially if the two numbers are equal for a few years (balanced budget) but that is just an illusion. Remember first principles when thinking about this.

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