Can Hyperinflation Happen?
I asked a financially astute friend: “Is this guy a nut job? It’s hard for me to tell.” His response [below] is worth sharing:
He’s not a nut job. I think he may be overstating his case because big fear sells better than little fear.
Why inflation is unavoidable (don’t give up yet - down below I’ll explain how the worst of it it could be avoided)
1) The budget deficit is huge and going the wrong way.
2) The dollar will drop in value because of the trade deficit and business slowdown.
3) The price of fuel and food are going up dramatically.
4) The only way out of the mess is inflation
–This latest bailout mess is the government taking a bad situation and making it worse. Look at who was for the bailout and who was against it. Bush and the democrats in congress thought it was a great idea. The republicans, who are generally pro business and fiscally conservative, thought it was a bad idea.
–Bush has generally been making every possible wrong move for the economy (actually, in many cases failing to make the right move) for eight years now and that by itself is killing us.
–There are so many places where the ethic of get rich quick with little or no work is killing the economy. The speculators who bought homes just to flip them in a few months or even weeks. Look at [company XYZ]. [name deleted] is pretty open about the fact that he started [company XYZ] with the idea that he would put together a product quickly and sell the thing to [company ABC] for some outrageous amount with very little work. Think how many times that has played out throughout the economy. Sometimes you can get lucky but most of the time you have to really do something to make money.
–Look at the old HP and the current version. Hewlett and Packard did not set out to get rich. They got rich by doing something people really needed and doing it well with a lot of hard work over a long period of time. Now we have a bunch of execs who just want to do whatever makes them the most money. Do you think Carly really gave a [expletive deleted] whether or not HP built a good product?
–The Chinese have been holding down inflation for years by selling us cheaper and cheaper products. You can’t keep that up forever. Their wages will go up. They are also walking a tightrope there trying to push all of the job growth. If you walk a tightrope long enough, you will fall. I hope that fall will not be too bad but it could be. Either way our consumer goods will start to cost us more.
There are a couple of scary facts about hyperinflation. In the past, it has been limited to a single country that was not key to the world economy and the health of the rest of the world could moderate it and help them to eventually get out. Hyperinflation in the Weimar Republic in Germany directly led to Hitler.
There are three ways to get out of debt:
1) get more income
2) default on the debt
3) for a government you can take the “painless” route and inflate your currency
I say “painless” because it does not require any tough political choices - they just let it happen while they are getting points for “solving” problems by spending more money.
The best way out of debt is obviously to earn more money. There are many ways the US economy could get better but they all require some technological advance or some period of pain.
The best answer that I can see would be if the US developed clean energy sources. It could mean a lot of new jobs in the US and money flowing into the US instead of out of it. That is one place that Obama wants to spend money that could actually do some good.
In short, there is some probability that we will be taking wheelbarrows full of cash to the grocery store as they did in the Weimar Republic but neither I nor anyone else knows what that probability is.
If we do have hyperinflation you want to borrow a lot of money and buy hard assets with it. I know an investment banker who bought a house on Ipanema Beach in Rio during their hyperinflation. He borrowed all of the money to buy it in local currency. After a few years the debt was worth a small fraction of its original balance (in real dollars) because of the inflation so he got a house on Ipanema Beach for almost nothing.