Whenever I hear someone say that we are going to have Hyperinflation, I respond that it is impossible because of wages. In the comments on my 2009 Financial Predictions I said:
…you cant hyperinflate wages in a global economy.
Think about it. If prices skyrocketed, would your wages? No, because at a certain price point, your job would be outsourced or eliminated. And without a job, you couldn’t afford to buy the goods that hyperinflated.
Guess what would happen next? Prices would plummet. This is a global economy. Employers will seek out the lowest cost for labor. Consumers will seek out the lowest price for goods and services. And where they intersect is the fair market value.
Karl from Market-Ticker wrote up a great blog today on this topic titled On “Hyperinflation”.
“Hyperinflation”, or even “Serious Inflation” (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages.
Zimbabwe is currently hyperinflating their currency, but they aren’t really an active participant in the global economy. What is their unemployment rate? It was 80% in 2005. If this happened in America, Bernanke would be swinging from his heels like Mussolini.
The problem in America today is we are plagued with bad debt. Deflation is the way an economy cleanses itself of bad debt. Taking on more debt, whether you are an individual or government, just makes the problem worse later. The sooner bad debt is removed from the system, the sooner the recovery can start.
Jan 12, 2009 — 11:17 am
Jan 12, 2009 — 7:58 pm
“You can’t have hyperinflation unless wages keep pace with prices.”
Yes, you can. If the world loses confidence in the US and there is a run on the dollar, the price of imports will skyrocket. Retailers which import nearly everything they sell, like Wal-mart, will pass on the rising costs or go out of business. Just because wages remain stagnant doesn’t mean hyperinflation isn’t possible. The government will have to step (and print even more money) in to prevent people from starving.
Starving the masses is a perfect way to implement a global agenda.
The debt will continue and never be removed until there is a re-established monetary system. One way or another. This is what the world is faced with eventually. Either that, or China will start sending us things for free.
Jan 12, 2009 — 8:28 pm
When the dollar loses value, our exports become cheaper. Companies like VW and Honda build plants, because the dollar is so cheap. That creates jobs and so on.
If the consumer can’t buy the goods, then they don’t. This country is real good at producing food, so I fail to see how hyperinflation gets any legs since agriculture commodities are sold in US Dollars.
Also, you seem to believe the rest of the world has stronger balance sheets than the US. European banks are almost twice as levered to falling assets as our banks. Japan? The strong YEN is crushing what is left of their export business. China? On the brink of civil war and completely dependent on exports, which sucks in a global recession. Like it or not, the USA is smartest kid on the short bus.
Still can’t have hyperinflation without someway to inflate wages and you can’t do that unless your economy is closed.
Jan 12, 2009 — 9:36 pm
That’s wishfull thinking at best.
The last nail in the coffin is the “confidence” in the dollar. It can’t last forever. As soon as that’s lost the possibilities are endless.
Order out of chaos will be the follow up next phase.
Jan 13, 2009 — 12:15 am
To name a few…
Leverage Ratio (total assets/equity) 30-Jun-08 |2007
UBS 46.9 | 63.9
ING Group 48.8 | 35.3
HSBC Holding 20.1 | 18.4
Barclays Bank 61.3 | 52.7
BBV Argentaria 20.1 | 18.6
Deutsche Bank 52.5
Fortis 33.3 | 26.4
KBC 24.4 | 20.5
Lloyd’s TSB 34.1 | 31.0
RBS 18.8 | 21.8
Credit Agricole 40.5 | 34.8
BNP Paribas 36.1 | 31.5
Credit Suisse 33.4 | 31.5
How is that wishful thinking? 61% for Barclay’s and 52+% for Deutschebank.
Europe is completely screwed and Michael is right. I’d like to know how facts are wishful thinking.
Jan 13, 2009 — 6:48 am
Wishful thinking? I clearly stated in the 2009 post that I think we are heading into a depression. Unemployment is going up and real estate is going down further.
I don’t see the dollar falling. Currencies do not trade on their own merit, but in relation to other currencies.
In order for the USD to fall, another currency must rise. Please tell me what currency the USD will fall against. Except for a short-term spike in the YEN (carry trade unwind), I do not see a contender out there with a stronger currency. If you do, please share.
Jan 13, 2009 — 8:07 am
Ed – Inflation is caused by too many dollars chasing too few goods …period. You have yet to shown how your theories cause this.
MAS – We just had a huge inflation in housing prices even though wages were stagnant. The inflation was transmitted through debt instead of earnings. I doubt excessive debt is coming back anytime soon, but what if there is a third way we have not thought of yet?
Money is like water …if there are too many $s chasing too few goods it will find the path of least resistance …which may or may not be wages. Anyway, I think KD is probably right on this, but I’m not ready to call it yet.
Jan 13, 2009 — 8:16 am
Sure, the end game is some form of inflation. Not hyper-inflation. The currency will be backed by some form of debt.
What happens if we can’t attract investors to Treasuries? Interest rates rise. This strengthens the currency.
Jan 13, 2009 — 10:52 am
Don’t get me wrong …I think hyperinflation is unlikely, particularly given all the deflation and deleveraging going on.
And there is only one scenario in which I think it is possible:
– Economy starts to recover.
– Treasury rates rise.
– Fed can’t meet the interest obligation, so they “print money” by selling treasuries to them self.
– This begins to feed on itself and floods the economy with more and more dollars.
– This dilutes the value of each dollar and assumes the real economy continues to produce the same amount of goods and services (continuing to make everything relatively more expensive).
I think it is too far in the future (3-10 years) to know if this is is a possible outcome, but it is the only way I can envision hyperinflation occurring.
It is also not sustainable (unlike wage hyperinflation), so it must end badly… since the tax base would shrink (relatively), it can only end in default.
Jan 14, 2009 — 1:25 pm
You stated that hyperinflation can’t occur because wages can’t rise in the global economy. Does that same logic hold true for deflation and dropping wages?
My instincts say it does not, and that we could see a drop in wages in the coming years, but I’m pretty new to this stuff, so I figured I’d ask.
Jan 14, 2009 — 3:45 pm
I’m not sure I understand the question, but wages tend to fall in recessions, regardless of how the recession got started. With higher unemployment, pressure to increase wages goes away. And desperate workers will take a lower wage.
At the end of the dot-com boom I was grossly over paid. Got laid off and then rehired during the recession at a discount rate. Once the economy picked up, I got pay increases. In the end, it all evened out.
Jan 14, 2009 — 6:13 pm
Andrew – I agree with MAS’s comment, but think that wages are too narrow of a measure. Cheap credit (i.e. home equity and 0% car financing) had a huge inflationary effect these last 10 years, but globalization had a big deflationary effect (i.e. WalMart and outsourcing).
On the other hand hyperinflation or severe deflation tend to be the result of feedback loops:
– Hyperinflation – Prices rise, wages rise, prices rise again…
– Severe Deflation – Houses drop in value, foreclosures increase, houses drop in value again… OR UE increases, people buy less stuff, UE increases again…
Hyperinflation has the distinction that it could theoretically go on forever, where as deflation has to hit a bottom somewhere (i.e. houses can’t go to zero and eventually foreclosures stop).
My theory regarding T-Bills above is premised on the idea that eventually the interest would become a huge source of income for T-Bill holders (who would spend the money), but one that does not actually produce anything (thus inflationary). There are so many variables and it is too far in the future to attach any certainty to this theory though.
Jan 17, 2009 — 11:32 pm
RE:”I do not see a contender out there with a stronger currency. If you do, please share”.
Countries have begun hoarding gold for a while now, I suspect because its the most stable currency and has been for over 5000 years. One also can assume that trust in the dollar is starting to slide.
re:”Sure, the end game is some form of inflation. Not hyper-inflation”.
the reasons for hyper-inflation far outweigh a regular cycle of normal inflation.
re:”Ed – Inflation is caused by too many dollars chasing too few goods …period. You have yet to shown how your theories cause this”.
There not my theories….Im just the messenger. I thought I gave enough info so far….I’ll elaborate more tomarro, its late.
Jan 18, 2009 — 10:55 am
The money supply is only one of three factors that determine whether prices rise or fall. The other two are changes in the velocity of money and the real output of the economy. Since the dollar is no longer backed by gold the biggest threat of hyper-inflation lies in a dramatic increase in the velocity of money due to a loss of confidence, not in changes to the money supply.
When confidence in a currency begins to wane, money starts to flow at a rapid pace. In normal noninflationary times the money supply might be equivalent to three months output, but in a period of hyper-inflation it might drop to two weeks worth. The increase of the velocity of money has the same impact on prices as an increase in the money supply. Due to the effects of the velocity of money, the ebb and flow of confidence have a much greater impact on the short-term trend of prices then changes in the money supply.
Some may balk at using history as a guide, but the best example of a country that experienced hyper-inflation that was preceded by deflation was Germany. Even though todays global econmy is exchanged in fiat currencies , high levels of debt and severe cases of deflation cause a loss of confidence in a currency by shrinking the economy and making the government’s debt appear increasingly unsustainable. The loss of confidence then can cause the flow of money to speed up as people exchange cash for real goods as fast as possible causing hyperinflation.
As Germany experienced a deflationary collapse, It was harder for the people to buy basic necessities due to high unemployment. Businesses were strapped for cash to by materials and make payroll. Fearing a total collapse that would send more people out in the streets, the government’s printing presses went into overdrive to desperately try and re-inflate the economy. As a result of the money supply’s rapid expansion, massive foreign debt and shrinking economy, German citizens lost all confidence in their currency and billions of marks entered the marketplace.
Even though the worlds reserves weren’t held in marks, the same thing may happen today, since the world is a smaller place and sophisticated debt instruments can be bundled and sold thousands of miles away makes it even more of a likely scenario, and its possible that hyper-inflation could be exported from somewhere else depending on their economic issues.
Does anyone see a parallel in all of this?
I think all to often people believe what they want to hear. I like to hope for the best expect the worse, and with all due respect, the “end game” isn’t synonomous with “cyclical patterns”.
Jan 18, 2009 — 11:22 am
Mauldin’s last newsletter cited that 10 Trillion in stock and real estate value was lost in 2008 (just the USA). The FED/Treasury increased its debt obligations by 1 Trillion. 10%.
Things are changing rapidly and we are in uncharted territory. As of now, JAN 2009, I see deflation. Maybe I’ll join your camp by this time next year. I’ll keep an open mind.
Jan 18, 2009 — 7:02 pm
Im still going to party like its 1999, but Im keeping an eye on China this year.
Jan 18, 2009 — 8:42 pm
Ed – We don’t need a gold standard. This is just gold bug tinfoil. The lack of a gold standard has nothing to do with this crisis and it is a red herring.
The are also causation issues with the “confidence in a currency” argument. Did the people lose confidence because the government printed or did the government print because the people lost confidence? I would say the former …and although I expect the Fed to print, it is not clear yet if they even can stop deflation let alone ignite inflation.
MAS – I think Mauldin compared apples and oranges (wealth versus cash flow). A better comparison is stimulus versus the gap in GDP (both cash flow). Although TARP is probably mostly a transfer of wealth from future taxpayers to the banks, since they won’t loan it and turn it into cash flow.
$10 trillion in lost wealth is truly stunning though. Buy and hold baby …you are gonna miss the start of the next big bull market! Honestly, I think these morons are just like used car salesmen, only with better suits! 🙂
Jan 18, 2009 — 10:07 pm
“Ed – We don’t need a gold standard. This is just gold bug tinfoil. The lack of a gold standard has nothing to do with this crisis and it is a red herring”.
Like I said. Countries are taking note of world wide instability and hoarding precious metals and commodities. There’s a reason also why some countries are dropping the dollar standard and reverting to protectionism. Its about protecting their assets.
When world leaders meet together I doubt they’re trying to figure out a way to prop our phony economy so that we can continue to siphon the worlds resources. More likely its about how to replace the current disentigrating financial system.
A gold standard isn’t such a bad idea, it worked before.
get rich or die tryin….50 cent did it. There’s still room and time for one more.
Jan 18, 2009 — 10:55 pm
It appears the invisible hand smacked us upside the head. To be fair though, we created the best phony economy in the history of the world! 🙂
Anyway, I still disagree with your thesis, but I admire your spirit Ed. And at least you are forcing me to think, which is alot more than most bloggers can accomplish…
Jan 20, 2009 — 10:00 am
Interesting …Soros summed up my view perfectly in this short article:
I’ve not seen this thesis anywhere else (yet!)…