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Should You Worry About Hyperinflation?

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Written by Geoffrey Pike
Posted March 7, 2014

Proponents of the Federal Reserve think it is accomplishing a great balancing act in stimulating the economy while also keeping price inflation relatively low. In fact, many proponents would even suggest that the Fed should do more to get the price inflation rate higher.

Meanwhile, some critics of the Fed believe we are in danger of hyperinflation. After all, there certainly are conditions that could make for much higher price inflation given the unprecedented national debt and the shaky economy, which could encourage the Fed to create even more money out of thin air.

So what are the chances of a hyperinflation scenario in the U.S.? Is it something we should worry about? Is it something we can prepare for?

I will typically try to distinguish between monetary inflation and price inflation. For this article, a reference to hyperinflation will relate to prices.

Some people will define hyperinflation as annual price increases of 50% or 100%. Others will define it as daily price increases, as was seen in Weimar Germany in the 1920s.

For this article, I am defining it as the latter: runaway inflation where prices are going up every day.

The Factors of Price Inflation

There are two main factors in the overall price level, and the first is the supply of money. As the supply of money increases, the overall price level will also increase if everything else remains the same. It's more money chasing the same number of goods.

The second factor, which can be a bit more confusing, is the demand for money, or velocity. If there is less demand for money (higher velocity) — all else being equal — prices will generally rise. It means people have less desire to hold large cash balances and are more anxious to spend. Money changes hands more frequently, and this will bid up prices, just as you would see at an auction.

If the demand for money increases, prices will be pushed down as people spend less and save more.

But if there is a higher demand for money at the same time there is an increasing money supply, these factors can offset each other, as we have seen since 2008.

It should be noted that the overall price level is affected by production, too. As technology and production techniques get better over time, this can lead to a reduction in prices as more goods are available. This is evident in the electronic industry, where prices for computers and televisions have gone down considerably, even in the face of an increasing money supply.

In addition, government taxes and regulation can make prices more expensive.

It is important to note that this is a discussion of the general price level. There will always be fluctuations in individual goods and services, depending on the supply and demand of the individual product.

But in terms of whether we will see hyperinflation, we only have to concern ourselves with the supply of money and the demand for money. These will be the determining factors.

Demand, Based on Expectations of Supply

When people think of hyperinflation, they will usually think of an ever-increasing supply of money. As Milton Friedman once said, "Inflation is always and everywhere a monetary phenomenon."

And of course, hyperinflation does typically start with an ever-increasing supply of money. But interestingly, at some point, the price level will go up faster than the supply of money.

It is not just a question of what the current rate of monetary inflation is; it is also a question of what people expect the monetary inflation rate will be in the future. Expectations can play just as big of a role as the current situation.


If people expect that the rate of monetary inflation will never stop — or worse, continue to accelerate — then velocity will increase. The demand for money will go down. People do not want to hold on to a currency that is continually being debased, especially when they fear it will get worse in the near future. It makes sense that people would want to get rid of their depreciating currency in exchange for hard assets that will retain their value.

In a situation of runaway inflation, most people will purchase whatever is available, even if they have no immediate need for it. You would probably rather buy some clothes that are too big than hold on to your cash and see it purchase almost nothing in the future.

This can have a rapid snowball effect, which is why runaway inflation scenarios typically do not last that long. The value of the currency quickly approaches zero.

The central bank's only hope in stopping it is slamming on the monetary brakes and trying to persuade the public that the monetary inflation will stop. This may or may not be convincing enough to reverse the runaway inflation. It will depend on how close to hyperinflation they are and whether the people have lost all confidence in the currency and the central bank that manages it.

One interesting thing to think about is that you could technically have a runaway inflation scenario without an increasing money supply. If every American became educated overnight on the Fed and the dangers of a fiat currency and immediately started buying hard assets with their dollars, then we would actually see a runaway inflation of prices due to the massive drop in money demand, despite not necessarily having a huge rate of monetary inflation.


When discussing free markets, it is common to talk about self-interest. But what about self-interest when it comes to politicians and central bankers?

We know politicians generally look out for themselves and consider the American people later, if at all. They prefer to hold power and exercise it over others rather than actually doing what is right and just.

It is the same with most central bankers. They enjoy their power over others, centrally planning the economy, and having the power to make markets move with just a few spoken words.

The people working at the Fed do not want to lose this power. They have a vested interest in maintaining something similar to the status quo.

It would not make much sense for the Fed to lead us into a hyperinflation scenario, as this would destroy its power. It would be risking the whole institution.

On top of this, the members of the Fed have government pensions denominated in U.S. dollars. They won't want to risk everything they have by triggering a runaway inflation. They might get away with 10% or 20% annual price inflation, but they will not survive a hyperinflation scenario.

For this reason, I highly doubt we will see hyperinflation in the U.S. The only possible way I see it happening is if the Fed waits too long to tighten and it becomes too late to reverse the loss in confidence.

(This, of course, assumes that tens of millions of Americans become somewhat educated on the workings of the Fed and the dangers of a fiat currency imposed by the government in a short period of time.)

Prepare for the Worst

If you believe we are going to see hyperinflation in the U.S., then you need to be doing a lot more than buying gold. You should be finding another country to live in — or else a place in the woods where nobody can find you.

If there is a complete breakdown of the dollar and nothing already in place as an alternative, we could see a complete breakdown of civilization. Why would workers show up at work to get paid in worthless dollars? Why would trucks deliver food to the grocery stores or gas to the gas stations?

I don't think it will come to this, but if you really do think there will be hyperinflation in the U.S., you should have an exit plan.

A more likely scenario is higher price inflation, maybe similar to what was seen in the 1970s. At that point, the Fed will be forced to stop the monetary inflation, just as we saw back then.

Hopefully it will be enough to prevent a runaway inflation of prices.

Gold and other hard assets can still be great investments, even without hyperinflation. While I don't think we will see prices rising every day, I do think we could easily see prices go up at double-digit rates on an annual basis.

Your investments should be prepared for any situation, but hopefully hyperinflation is not one of them.

Until next time,

Geoffrey Pike for Wealth Daily

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