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Good old Wikipedia: Hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue. A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.
If that doesn’t get the hairs on the back of your neck standing up nothing will. There are certainly many that believe we are in for big inflation, and the consensus on the pathway of this future development is first deflation then rocketing inflation.
The first instinct for anyone who is scared of inflation is to buy precious metals and if you look around the internet right now you will see you are too late. It’s gone or at least gone at a price remotely near the commodity exchanges price for it. This feels like a prediction of a future rally in the commodity futures markets but the value of precious metals are not well reflected at retail because to get to you they go through multiple middlemen astute at profiting from unsophisticated demand that comes and goes with the news.
But it is a signal to note.
In this new economic world of “whatever it takes” bailouts, it has to be remembered sometimes there is not enough of whatever there is to give to recover. The goal of government is to try and smooth a process that would otherwise be very rough and to minimize the damage. The result can still be rough and ruinous, just not as bad as otherwise. Can all these trillions be printed and not create an imbalance?
The answer in the modern model of economics (new monetary theory) that has been slingshotted into the position as the new orthodoxy, is that inflation can be controlled by taxes. So if these trillions escape and start to create inflation, taxes can be banged on to pull the money back out of the economy.
Great in theory but painful in practice and there is one flaw. Government won’t shred that tax money, it will simply spend it back into the economy. That is the DNA of government. Government does not tax to fund its budgets, it budgets to the highest amount it can tax. That is to say government doesn’t say “How much tax do I need to do our things,” it says “How much tax can we grab so we can do as much as possible” and of course it then borrows more and spends that too. So the “‘new monetary theory” of the way it can control inflation caused by monetization and straight money printing, falls down at the first hurdle because the control method is not politically possible.
Central banks used to use the economy to regulate money supply. Banks created monetary demand that drew down money from the central bank; in theory that was a fine constantly adjustable method of balancing money supply. Then the banks went off the rails and trashed the system creating the circumstances for the GFC (global financial crisis, credit crunch, great recession… whatever you want to call it.) The central banks took this process back in house and used QE rather than the fractional reserve banking system as a way to keep the economy on track. Now the Covid-19 crisis situation isn’t their fault and they are trying their hardest to keep the system from complete collapse. They have their tool kit but it is not designed for this purpose.
Historically in a situation of collapse a government prints money and spends it. This creates inflation because the new money does not come with a real liability so is free to be used willy-nilly. It is easy come, easy go money. QE didn’t have this effect because the money came with a liability attached, which meant you couldn’t just blow it on a whim or on exaggerated prices, unless of course you bought an asset like an overpriced stock or property.
Back in the old days, after war, for example, you buy time for the economy to reset by printing money in a way that in effect cancels the value of old unrepayable debts, the value of pools of earned but inconveniently placed existing money while keeping things busy until the moment the situation is sufficiently reset you can cancel the old money entirely and introduce a new currency which is then, hopefully, not put back through the inflation process. Don’t imagine for a minute inflation or deflation is not policy. If you think that Zimbabwe can organize inflation but the denizens of the Bank of Japan can’t, then think again.
So the world economy has been frozen and the thaw will take too long to save the old system. Deflation will make the recovery situation worse and in the end how are we going to have deflation for long, after oceans of money have been injected into the system to avoid complete meltdown.
Once the system is shocked back into life, then what? There will be a gap in output. Massive unemployment. A huge budget deficit… straight out of the text book for the conditions for hyperinflation.
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Clem Chambers is the CEO of private investors website ADVFN.com and author of 101 Ways to Pick Stock Market Winners and Trading Cryptocurrencies: A Beginner’s Guide.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.
