Sunday , 21 April 2024

Hyperinflation: 10 Questions & Answers (+10K Views)

The statements or questions below are in bold and my responses follow.

1. How is hyperinflation defined?

The International Accounting Standard of IAS 29 says there is hyperinflation when “the cumulative inflation rate over three years approaches, or exceeds, 100%.” This works out to 26% per year….

Note that hyperinflation is not defined in terms of the money supply alone, since the velocity of money and GNP are also key factors in the price level during hyperinflation. Hyperinflation is a process, a positive feedback loop, that once entered is very hard to get out of. This process can go on for years.

2. Is there a real chance the U.S. dollar could get hyperinflation?

Hyperinflation happens when government debt is over 80% of GNP and the deficit is over 40% of government spending (Bernholz did a study of 29 cases of hyperinflation and looked at the circumstances that lead up to them and found that the best predictor of hyperinflation were these numbers for debt and deficit.). The U.S. is at or near these numbers, so the danger of hyperinflation is real.

What happens is that the more the central bank prints money and buys bonds the less other people want to hold bonds – but the less other people hold bonds, the more the central bank has to buy them so the government has enough money to spend. You get a positive feedback loop or death spiral.

3. Has hyperinflation ever happened in America?

… There was hyperinflation during the Revolutionary War (remember, “not worth a Continental”?) and in the South during the Civil War. I also think that if the U.S. had not made it illegal to own gold in 1933 that the Fed would have gone bankrupt because they did not have enough gold to back all of the notes they had issued, and that paper money would have become worthless then too.

Hyperinflation is more common than most people realize. The time periods from the Revolutionary War hyperinflation, to the Civil War hyperinflation, to the 1930s currency crisis, to now, are all similar. To me this looks like some major currency crisis cycle is about due.

4. What is the math for hyperinflation?

The math for hyperinflation starts with the equation of exchange and with one transformation you get:

P = M * V / Q

Where the variables are:

P = Price level

M = Money supply

V = Velocity of money, how many times money turns over in a year

Q = Real GNP

In hyperinflation the money supply is going up, the velocity of money is going up, and the real GNP is going down, all at the same time. It is a triple whammy that drives prices up really fast.

5. What comes first, hyperinflation or money printing?

…Hyperinflation is really a positive feedback loop. It is a circle, a death spiral. To argue about what comes first in hyperinflation is a bit like arguing which came first, the chicken or the egg.

6. Why can’t you stop hyperinflation by just having the central bank stop monetizing debt?

It seems obvious that if you just have the central bank stop buying government debt the hyperinflation would stop. The problem, [however,] is that the government needs money to operate and is spending far more than what it gets in taxes and has debt around the size of the GNP. The deficit is so large that cutting government or increasing taxes enough is not possible.

The only way the government can keep in operation, when other people stop buying their bonds or even rolling over their bonds, is if the central bank steps in so the government always makes sure the central bank steps in. This may take changing laws or replacing people at the central bank, or just ignoring laws, but the government will get the money or it is bankrupt.

7. Could the Fed cause hyperinflation on its own?

[No!] It is always the combination of the government spending far more than it gets in taxes and the central bank printing money and buying government debt (monetizing debt). When they are in this situation they can not borrow more, except from the central bank under their control so they get the central bank to make money and “loan” it to them.

When the reality is [that] the only way they can pay back that “loan” from the central bank is by first getting another “loan” from the central bank you are probably headed for hyperinflation.

8. Isn’t hyperinflation a political event and not a monetary event?

The root cause of hyperinflation is politicians spending far more than they get in taxes. In this sense hyperinflation is a political problem. However, I think Milton Friedman was right when he said “inflation is always and everywhere a monetary phenomenon”….[and I believe that] to think otherwise…is not only wrong but dangerous. This wrong idea keeps people from understanding what is really going on.

For example, Modern Monetary Theory (MMT), as it stands, does not explain hyperinflation. They do not see any tipping point, positive feedback loop, sudden risk, or danger of inflation getting out of control. They think that you could always just make a bit less money if inflation got too high. Instead of admitting the problem with the theory (lots of experimental evidence of inflation getting out of control) they just say hyperinflation is a political event not a monetary event. This is like science with a bit of magical thinking – just wrong.

9. In a hyperinflation scenario would the U.S. dollar fall relative to other currencies?

Other countries have all sorts of problems too, so the U.S. dollar may not drop against those other currencies.

Hyperinflation is not really about exchange rates. If the Pound, Yen, Euro, and Dollar were all getting 26% inflation the exchange rates could stay the same but we would still have hyperinflation.

10. Can hyperinflation happen to the USD – the world’s reserve currency?

It is only since 1971 that the world has had a fiat currency as a world reserve currency. In the past it was always gold or silver or a currency convertible to gold or silver. It is not possible to get hyperinflation when using gold and silver.

Hyperinflation happens to fiat currencies [so, yes, hyperinflation can happen to the U.S. dollar].

Concluding Thoughts

While fiat money is created out of thin air, no alchemy yet can make gold out of nothing so, while any paper money always has some risk of becoming worthless, the same is not true for gold and silver so, when fiat money is at risk of failing, the “hard money”, gold and silver, seems to do well.

Related Articles From the munKNEE Archives:

1.  Will Hyperinflation Happen in America? Here Are Economic & Political Worst Case Scenarios

I have been reading a lot lately about the coming hyperinflation in America… [and while] I respect many of the writers [who express that opinion] I think they are jumping the gun. At this point none of the economic or political factors required to set off hyperinflation are present – and a careful analysis of theory, fact, and history leads me to conclude that inflation/stagflation is our future. It is quite a leap of fancy to say we are certain to have hyperinflation. Words: 278

2. These 6 Charts Illustrate That Hyperinflationary Pressure in America Is Growing

The six charts I provide in this article illustrate why the hyperinflationary pressure in America is growing. This is not necessarily a forecast for hyperinflation – this is simply a demonstration that some of the precursors to a hyperinflationary cliff are building. (Words: 1001; Charts: 7)

3. Runaway Inflation That Would Devastate USD Seems Unlikely – Here’s Why

Many investors are treating inflation as a certainty because the Fed has expanded its balance sheet to unheard of levels through its quantitative easing strategy. Some have even gone so far as to say that this program will utterly destroy the U.S. currency. To demystify this conclusion, I’m going to explain quantitative easing and why the Fed is using this monetary strategy. Afterward, I’ll explain why gold is still positioned to rise even if inflation continues to be low. Words: 786

4. If You Are Not Preparing For a US Debt Collapse, NOW Is the Time to Do So! Here’s Why

Timing the U.S. debt implosion in advance is virtually impossible. Thus far, we’ve managed to [avoid such an event], however, this will not always be the case. If the U.S. does not deal with its debt problems now, we’re guaranteed to go the way of the PIIGS, along with an episode of hyperinflation. That is THE issue for the U.S., as this situation would affect every man woman and child living in this country. [Let me explain further.] Words: 495

5. von Greyerz: 4 World Crises – Sovereign, Banking, Economic and Social – Guarantee a Hyperinflationary Depression

We are in a number of crises: the sovereign crisis, a banking crisis, an economic crisis and a social crisis. The first three crises together are guaranteed to bring down the world economy because they are not just in one country, they are worldwide….A social crisis will develop leading to even more social unrest. All of these factors are why this will ultimately lead to a hyperinflationary depression – the most serious depression the world has ever experienced – and why investors have to focus on protecting their wealth.

6. James Turk Interviews Robert Prechter: Which Will It Be – Hyperinflation or Massive Deflation?

James Turk believes hyperinflation is ahead. Bob Prechter believes massive deflation is coming. An interesting discussion between the two takes place in this audio. Ultimately, both lead to Depression. Only the route taken differs, but that is important.

7. High Inflation is Coming but Hyperinflation is Highly Unlikely – Why is That?

People get confused about the nature of mass inflation, hyperinflation, and what causes both. [Let me clarify the nature and causes of each.] Words: 930

8. A Hyperinflationary Great Depression Is Coming to America by 2014! Here’s Why

The U.S. economic and systemic-solvency crises of the last four years only have been precursors to the coming Great Collapse: a hyperinflationary great depression. Outside timing on the hyperinflation remains 2014, but there is strong risk of a currency catastrophe beginning to unfold in the months ahead…moving into a full blown hyperinflation [in a few] months to a year… depending on the developing global view of the dollar and reactions of the U.S. government and the Federal Reserve. [Let me go into more detail.] Words: 2726

9. Williams: U.S. Can Not Avoid Coming Financial Armageddon

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression… [at which time] a $100 bill in the United States will become worth more as functional toilet paper/tissue than as currency. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement. The article is long but well worth the read. Words: 3565

10. Williams: Expect Hyperinflation Within the Next 5 Years

Pushing the big problems into the future appears to have been the working strategy for both the Fed and recent Administrations, yet the U.S. dollar and the budget deficit do matter, and the future is at hand. The day of ultimate financial reckoning has arrived, and it is playing out. Words: 1096

11. New Boom-bust Cycle Risks Hyperinflationary Depression and Much Higher Gold Price – Here’s Why

It is my view that the world has entered a new boom-bust cycle driven by oil prices. Oscillating oil prices – as opposed to credit cycles – will repeatedly stimulate and crash the highly levered global economy. Governments have not recognized this new cycle, and as part of a fruitless effort to retain control over deteriorating real growth and rising unemployment central banks will print more and more money, risking a hyperinflationary depression (stagflation at best). [As such,] the only respite for many investors is gold. [Let me explain.] Words: 925

13. True Money Supply Is Already Hyperinflationary! What’s Next?

Economists are telling central banks to accelerate monetary growth even faster…to avoid a bank balance sheet implosion with all the deflationary consequences that implies. [As such,] the prospects for 2012, and thereafter, are for Total Money Supply to continue its hyperbolic trend – and when such a trend becomes established it becomes almost impossible to stop because the whole debt-based economy and the banking system would collapse. [Let me explain further.] Words: 550

14. How Likely Will Hyperinflation Occur in the U.S.?

There is a difference between inflation and hyperinflation…and there is no gradual path from one to the other. To wind up with true hyperinflation, some very bad things have to happen. The government has to completely lose control… the populace has to completely lose faith in the system… or both at the same time. [Are we there yet? Let’s take a look.] Words: 1188

15. 28 Countries Have Experienced Hyperinflation In the Last 25 Years

Hyperinflation is not an unusual phenomenon. 33 countries have experienced hyperinflation over the last 100 years of which no less than 22 have experienced it in the past 25 years and 4 in the past 10 years. The United States is one of the few countries to have experienced two currency collapses during its history (1812-1814 and 1861-1865). Could it happen again?

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Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.



  1. RE: Could the Fed cause hyperinflation on its own?

    Behold, to me it seems like they are doing their best to avoid it but by not changing their tight money lending practices to average Americans they are going to make it a reality!

    Greed of the Ultra Wealthy, is pushing the USA toward yet another conflict we cannot afford, and that conflict may be between those that have and those that have not! Many believe that the First Financial Civil War (FFFCW or F3CW) has already begun and the middle class was its first victim!