Over the past month I have read several articles by people smarter than me that believe hyperinflation or even sustained very high inflation is coming to America. Despite all the great arguments, I still have a fundamental problem with the thesis. How can a society continue to pay ever increasing amounts when wages are static or declining?
Where are people going to get the money?
- Not from wage increases, as severe currency devaluation would lead to rising costs that would certainly lead to more unemployment and further downward pressure on earnings.
- Credit? If the currency started tanking, there is no way the banks would keep open lines of cheap credit. Credit cards and revolving credit would cease to work. Why would a bank loan out $100 only to get paid back with a devalued currency? They own the hard assets. What is a fair legal interest rate in a hyper-inflationary scenario? That was a joke. I think their self preservation strategy will be to starve the economy of credit. Without an expansion of credit, I don’t see how hyperinflation can happen.
- Savings? Who has liquid savings in this country? Are we all going to run on the bank? Wouldn’t that drive the value of cash higher, especially if the bank pulls back on credit?
Fifty Billion Dollars by ZeroOne
If the citizens do not have the money or credit to buy gas at $15 a gallon, they won’t. There will be an immediate demand collapse and prices will fall. The only way hyperinflation can sustain itself is if there is a feedback loop that connects wages to prices.
In Zimbabwe, a country with hyperinflation, over 80% of the population is unemployed, so the government can print money and hand it out to the population. They don’t have credit and aren’t a real player in the global economy. We aren’t Zimbabwe. We are highly dependent upon credit, very tied into the global economy and without a way to tie wages to inflation.
Price pressures lead to margin collapse, layoffs and demand reduction. This reduces monetary velocity and causes prices to fall.
matthew
Apr 8, 2011 — 10:01 am
While I agree with the thesis, I also believe that thinking that prices can’t rise, because people can’t pay is non-sequitur. Eventually, input prices increases will either reduce margins to the point of bankruptcy or prices will rise. As good become more and more unnecessary (i.e luxury items), wages become less important.
As a real world example just look at the Jasmine revolutions. None of those people could even pay for bread, yet the food price increases kept coming. One bad harvest or another dust bowl and it is game over.
The only other option is that speculators run out of tankers and space to store all their oil and they get handed massive losses. If the losses are too great the taxpayers will just get called in as a backstop anyway.
Endgame: If you’re not part of the kleptocratic plutocracy bend over.
MAS
Apr 8, 2011 — 10:14 am
@Matthew – Where did I say prices can’t rise? I said hyperinflation or sustained very high inflation.
High inflation always leads to demand destruction without an increase in wages. The chatter today sounds an awful lot like 2008. That year everyone said I was insane for predicting oil would fall to $55/bbl. It did. Fuel prices can continue to rise. Something else will have to give. It will probably be more unemployment. Which will create more demand destruction and send fuel prices lower.
thomas
Apr 8, 2011 — 7:14 pm
Its weird how you don’t see trends being born or dying, just the rearview mirror angle.
You reminded me the mid-90’s when they used to have ladies night at a Cigar Bar in NYC. I went to see what it was like. Thin professional women puffing on 8 inches of cancer. I couldn’t make sense of it but figured it was here to stay. Maybe people CAN be sold into doing anything, as long as they don’t feel like they are being left out.
thomas
Apr 8, 2011 — 7:40 pm
*This was supposed to posted in another thread. However, the core message is oddly still applicable.
MAS
Apr 9, 2011 — 9:22 am
@thomas – well said.
Ed
Apr 9, 2011 — 11:15 am
“When a country’s public debt exceeds 90% of GDP, that is the magic number. You get to 90%, there is no way back, and that is the number that the U.S. is going through pretty much as we speak. It is also the number which the UK has gone through; all of the PIGS are going through it, as well. They are all going past the 90% debt to GDP ratio. Obviously, Japan is miles past it already. It’s up to 200%+. There does not appear, in the historical analysis, to be any great likelihood of getting back from that level of debt safely. There is this strong evidence that above 90% debt to GDP, you will experience either a cataclysmic default or some form of very serious inflation.”–Paul Tustain
MAS
Apr 9, 2011 — 2:07 pm
@Ed – I don’t doubt the quote. I think there will be some form of default. Maybe war.
Pablo
Jun 13, 2011 — 9:58 am
hello MAS,
Before I give my own answer to the question you have posed, I was hoping that you could provide one of your own: are you old enough to remember the late 1970s? If you aren’t — and I’m betting that you’re not — then it’s perhaps understandable that you would be baffled by what you see as a contradiction. There’s a word for it, and its called “stagflation”. That’s the term for an economy where prices are going up, in some cases dramatically, while unemployment remains high and goes even higher. That is exactly what happened in the late 1970s. It wasn’t just gas prices going through the roof, it was the price of everything. I remember it all too well, as I was in my teens when this took place: I can recall prices of groceries going up while my mom and I were shopping in the store! This happened numerous times, not just once. I also remember the fear on both parents faces when they talked about holding onto their jobs — they tried hiding this stuff from me, but a teen who thinks ever so slightly past porn and video games will still pick up on this stuff. And again, it wasn’t just my mom and dad, it was their friends, our neighbors, our extended family, everyone we knew.
I’m not saying that this is definitely happening again,but I am saying that its a possibility, and probably a very strong one. It sucks out loud, esp for anyone just starting out in the work world trying to make a living, too say nothing of people on fixed incomes like retirees and the disabled. I can only hope that people such as you and I will do our best to try to keep things together so that we can help out others who will be hit much harder than we will.
Buckle up, the ride’s about to get rougher. Just be sure to help others when you can
MAS
Jun 13, 2011 — 10:08 am
@Pablo – Although I don’t personally recall the high inflation of the 1970s, I’ve read many economic history books. The **big** difference now is we live in a connected world with wage arbitrage. There were feedback loops between inflation and wages back then that do not exist today.
Americans spend money on the things we need and the things we don’t need. When the price of the things we need goes up, we get angry, but all it means is we spend less on the things we don’t need. That forces those industries to adapt or die.
Technology is highly deflationary and it is moving at blistering pace. Wages are static. Credit is maxed. Savings are spent. There is simply no fuel to maintain sustained high inflation or hyperinflation. Yes, there will be periods of higher inflation (2008, 2011), but they will be interrupted by periods of deflation (2009).
I don’t debate that the ride is going to be rough, I just disagree with how that will play out.