Saturday , 13 July 2024

Hyperinflation Isn’t In the Cards – Here’s Why


…[As] we know, money creation by the Fed cheapens the existing supply of dollars and leads to higher prices for goods and services. That has happened progressively over time…[but] the extraordinary increase in the money supply by the Federal Reserve in such a short period of time last year has led some to expect the hyperinflation (or runaway inflation, as it is sometimes called)…but that does not seem to be happening, nor did it happen after 2008 when the Fed adopted very similar quantitative measures. Let’s see why not.

There are two specific reasons why runaway inflation did not happen a decade ago, and why it won’t likely happen now, either:

  1. The demand for money is overwhelming the desire to spend. People are choosing to pay bills, pay down debts and save money rather than borrow and spend more. The demand for cash counterbalances the supply of cheap credit available and, as a result, the cheap credit has fueled price explosions in stocks, bonds, and real estate. Now, all financial assets are overpriced and subject to huge downside drafts. This could lead to further drops in economic activity and a full-scale depression.
  2. The effects of inflation created by the Fed are unpredictable and the impact of that inflation has been declining for more than fifty years.

The chart below (source) shows the ratio of the gold price to the St. Louis Adjusted Monetary Base back to 1918…

A false assumption by some gold bulls is that the size of the money creation is mathematically correlated to higher prices for gold. If the inflation effects of money creation are not evident, it is assumed that gold’s price will eventually go up in a way that corresponds proportionately to the amount of money that has been created. This is not true:

  • The higher price for gold is correlated directly to the loss in purchasing power of the U.S. dollar; NOT to the amount of money created.
  • Just as important, the quantitative loss in purchasing power is unpredictable; and gold’s price increases to reflect that actual loss after it has occurred – not before.
  • A significant amount of new money creation is required ongoing just to keep debt deflation at bay and stave off economic collapse…[so, as] long as the Fed creates enough new money to prevent debt deflation, any amount of new money created above that level presents the potential for minimal inflation effects…


As the gold-to-monetary base ratio above shows, hyperinflation isn’t in the cards.

Editor’s Note:  The original article by Kelsey Williams, has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The authors’ 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. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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  1. A hyperinflation is usually the result of a collapsing economy. An excessive printing of money will not cause a hyperinflation (= loss of confidence into the government issued currency), but a failing production of food or other necessary goods may spark high inflation rates.

    The hyperinflation in Zimbabwe was caused by the failure to produce enough food for the country. Similarly, the hyperinflation in Venezuela was caused by the inability to produce enough oil for exports so the country could not buy the products it needed.

    The hyperinflation in Germany was caused by the losses of WWI which led to losses of production and gold reserves. Whatever was produced had to be exported abroad in order to satisfy the war reparations. There was not enough productive capacity left in order to satisfy consumer demand. That led to hyperinflation. What is also frequently overlooked, the hyperinflation was initiated by foreign exchange traders who sold short the Reichsmark in effect putting devaluation pressures on the Reichsmark.

    The US can produce all the food it needs. Even if the Chinese stop delivering consumer products to the US, the US economy is strong enough in order to produce all essential consumer goods. That by itself will prevent any hyperinflation in the US.

    To the best of my knowledge, there was never any case of hyperinflation where the underlying economy was able to satisfy the local consumer demand.

    It is the production of goods and services which really matters. A hyperinflation is only an indication that this production is failing.