The hyperinflation of a currency is typically described as an event, as if
one day everything is normal and then the next day hyperinflation is manifest
throughout the economy. This description explains, for example, how the
hyperinflations that destroyed the currencies in Germany in the 1920s, Serbia
in the 1990s and Zimbabwe more recently are generally viewed.
Hyperinflations, however, are not spontaneous. They do not appear “out of
the blue”. It is therefore more accurate to describe hyperinflation as a process.
There are many steps taken on the road to hyperinflation that ultimately and
eventually leads to the destruction of a currency.
The US government recently took a big leap down that road. When it
suspended the debt ceiling, which is the self-imposed limit on how much it
can borrow, it removed the last remaining check on the proclivity of
politicians to spend money. It abandoned the last semblance of any discipline
on federal spending.
In every year since the 2008 financial crisis, the US federal government
has been incurring an operating deficit of more than $1 trillion. Because it
is spending more than it receives in revenue, it needs to borrow dollars to
fund these deficits. These borrowings cause its total debt to grow, so the
debt ceiling must be raised periodically to enable it to keep borrowing. The
latest ceiling of $16.4 trillion was reached in January.
Rather than deal with out-of-control spending, politicians of both parties
agreed to suspend the debt ceiling, meaning that there will be no limit on
what the federal government can spend and borrow through May 18. On May 19,
the debt ceiling will be raised to the total amount of debt outstanding as of
that date, and as a consequence, at that time the debt limit must again be
considered to enable more borrowing to fund what is likely to be another year
in which the deficit exceeds $1 trillion. I fully expect that that this
scheme will repeatedly be used to avoid facing any limit.
This mechanism eerily parallels a step taken by President Nixon in August
1971. Rather than address the financial imbalances the US government faced,
he chose – in his words – to “suspend temporarily” the US dollar's
constitutional link to gold. His “temporary” suspension has now lasted 42
years. This observation brings up an important point.
This current suspension of the debt ceiling is not going to be temporary.
From now on, each time it comes up for consideration, I expect that the
politicians will just keep extending the suspension again and again. They
will always take the soft political option, just like the politicians did in
the German, Serbian and Zimbabwean hyperinflations.
The debt ceiling was never much of a limit because it has been raised
dozens of times over the years, but it did serve one purpose. It highlighted
the lack of political will to get spending under control. Importantly, the
dire financial condition of the federal government became apparent each time
the ceiling was hit. The last time it was reached, the US lost its Triple-A
credit rating.
Out of control spending by a government is always the cause of
hyperinflation. The debt ceiling had been the last remaining roadblock to
unlimited federal government spending. By suspending the debt ceiling, the US
government has given itself a blank cheque, taking one giant leap down the
road leading to the hyperinflation of the US dollar.
