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An article
entitled "How Hyperinflation Will Happen" has garnered a
lot of attention. According to this article:
"...hyperinflation
is not an extension or amplification of inflation. Inflation and
hyperinflation are two very distinct animals. They look the same -- because
in both cases, the currency loses its purchasing power -- but they are not
the same.
Inflation
is when the economy overheats: It's when an economy's consumables (labor and
commodities) are so in-demand because of economic growth, coupled with an
expansionist credit environment, that the consumables rise in price. This
forces all goods and services to rise in price as well, so that producers can
keep up with costs. It is essentially a demand-driven phenomena.
Hyperinflation
is the loss of faith in the currency. Prices rise in a hyperinflationary
environment just like in an inflationary environment, but they rise not
because people want more money for their labor or for commodities, but
because people are trying to get out of the currency. It's not that they want
more money -- they want less of the currency: So they will pay anything for a
good which is not the currency."
Except for the
part about hyperinflation encompassing a loss of faith in the currency, the
above is almost completely wrong. In particular, economies don't
"overheat", economic growth causes prices to fall rather than rise,
and hyperinflation is very much an extension of inflation. The author of the
article doesn't even mention money-supply growth. Trying to explain inflation
or hyperinflation without reference to growth in the money supply is like
trying to explain why the moon orbits the Earth without reference to gravity.
All historical
episodes of hyperinflation that we know of -- and we know of many -- have
been step-by-step processes set in motion by, and sustained by, increases in
the supply of money. After the supply of money grows at a rapid rate for a
period of at least a few years, some people conclude that the inflation will
be endless. These people act today in anticipation of tomorrow's
money-supply-induced price rises. As time goes by, more and more people come
to the realisation that the inflation will most likely be endless and begin
to act (meaning: buy stuff immediately) in anticipation of future price
rises, which eventually leads to the situation where prices are rising much
faster than the supply of money.
At this point it
would still be possible for the central bank to clamp down on the inflationary
trend by stopping, or even just slowing, the expansion of the money supply,
because rapidly rising prices throughout the economy would result in a money
shortage unless the supply of money were given a substantial boost. At the
same time, however, the central bank could be under considerable political
pressure to accelerate the monetary expansion given that doing otherwise
would lead to extreme short-term economic pain. This, in effect, is what
happened in Germany during the early-1920s: at every step along the
multi-year path from inflation to hyperinflation to the complete collapse of
the currency it was deemed by the central bank to be less economically
damaging to maintain or accelerate the inflation than to suddenly bring it to
an end.
The point we are
trying to make is that hyperinflation doesn't just happen 'out of the blue'
one day when nobody expects it. Instead, it requires persistently high
money-supply growth and evolves over many years due to a gradual increase in
the awareness of the population. It is part of a PROCESS and definitely is an
extension of inflation, but most episodes of inflation don't lead to
hyperinflation because the authorities stop the monetary expansion before
it's too late.
Lastly, it should
be noted that while most episodes of inflation don't extend to the point
where the economy experiences hyperinflation, all paper currencies eventually
get inflated to oblivion. The reason is that circumstances finally arise
whereby the most politically expedient move is to risk hyperinflation by
continuing the monetary inflation way beyond 'normal' limits. In this regard,
today's paper currencies won't be exceptions.
Steve Saville
www.speculative-investor.com
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