No, hyperinflation is not around the corner

Inflation is the destroyer of worlds. It destroys purchasing power, increases the signal-to-noise ratio of prices important to entrepreneurs and business managers, and distorts accounting records. Its unequal effects may make unprofitable firms and projects appear profitable, and profitable firms appear to be losers. When it persists, it becomes a major hindrance to economic growth, increases unemployment, and rewards borrowers at the expense of lenders. Depending on the origins of inflation, it may also facilitate exorbitant government spending beyond what tax and tariff incomes would allow.

But the nation does not need to experience an explosion of hyperinflation like Weimar for all kinds of devastating effects to be realized. Relatively low inflation levels will do the trick as easily as a few rare and extreme episodes that have captured the attention of economists and charmed netizens. Searching for the phrases “hyperinflation (is) around the corner”, “hyperinflation is coming” and “hyperinflation imminent” on Twitter reveals low-level hype about the idea that any rise in the general price level is likely to generate a stunning disintegration of the price system. This is not impossible, but it is highly unlikely, for a number of reasons.

  1. The Federal Reserve’s 2008 transition from the floor to the corridor system includes an interest-on-reserve (IOR) payment. This effectively ensures that a large portion of the money stock remains in the Federal Reserve, and is not loaned out or chased for goods and services. This amount is currently around $3.2 trillion. If necessary, the Fed could raise its “inside” rate, attracting more money in pursuit of essentially risk-free returns.

US Reserve Balances with Federal Reserve Banks (2017–present)

(Source: Bloomberg Finance, LP)
  1. The Fed currently expects inflation to decline next year, and market participants currently expect the federal funds target to reach only about 3.8 percent by the end of 2023.

Implicit market policy prices, 1 year

(Source: Bloomberg Finance, LP)
  • There is also, within the Federal Reserve, a target for price normalization, given that 144 of the past 173 months (back to January 2000) were at a level of less than one percent nominal, negative in real terms. That may be a mistake, but given Volcker’s tenure (during which rates were raised to more than 20 per cent), there is still plenty of policy room for the Fed to work within its limits. If inflation continues to rise or even accelerates, the Fed will simply chase it higher and higher rates, or increase the rate of balance sheet unwinding, currently removing about $95 billion per month from the US economy. It can also be involved in other unconventional operations. The Central Bank of Afghanistan has not taken an exceptionally radical approach to dealing with hyperinflation, arguably the antithesis of “helicopter money,” for other reasons several years ago.
  1. At the moment, there are indications that markets and consumers expect inflation to be high for a while and then subside. If the markets prove wrong, arbitrage opportunities will arise. Consumer expectations may be wrong, but at present they do not indicate the possibility of persistently high inflation as occurred in the 1970s (which was also not hyperinflation). The difference between the current 5-year general US government bond and the 5-year Treasury Inflation Protected Guarantee (TIPS) yield is currently estimated at an average annual inflation of 2.52 percent through 2027.

TIPS Yield Spread on US Treasury 5-Year 5-Year (April 2022 – Now)

(Source: Bloomberg Finance, LP)
  1. Unlike the Zimbabwean dollar or the Venezuelan bolivar, the dollar is more than just a currency. It is a safe haven asset and a universal unit of account. The demand for the US dollar is very high, although monetary technocrats would be wise not to test the limits of this adage. Global demand for dollars leads to efficient export of part of the inflationary effects of expansionary monetary policy. Although this sounds like good news for Americans and not good news for dollar users, in many emerging markets, the inflated US dollar is likely to be less inflated than the local currencies.

Inflation rates in emerging markets year on year (2012–present)

(Source: Bloomberg Finance, LP)
  1. Most previous outbreaks of hyperinflation began with massive, emergency-driven policy partnerships between fiscal and monetary authorities. Two common themes are an order by a head of state or an executive body to print money to meet financial obligations on an unlimited basis, or to monetize unsustainable debt burdens. While neither is impossible within the United States, the first is currently illegal, and the second is, for the time being, a matter of particular urgency. But these are the reasons why the independence of the Federal Reserve and the reduction of outstanding US debt is so important.

None of this should be interpreted, though it likely could, as either excluding inflation risks or giving credence to the Fed’s anti-inflation expertise. Characteristic features of periods of hyperinflation are interesting to some, carrying impractical piles of physical currency to buy simple goods, prices changing hourly, etc., but wholly unnecessary for inflation to destroy economic account and voluntary, peaceful exchange. In England, at the moment, the currently harmonized CPI is up 10.1 percent year on year, not close to the rates that Philip Kagan classified as hyperinflation in 1956, but devastating nonetheless. The pursuit of sound money is more profitably geared toward identifying wasteful monetary policy measures, rather than predicting uncommon and unusually unlikely outcomes.

Peter C Earl

Peter C Earl

Peter C. Cryptocurrency consulting. His research focuses on financial markets, monetary policy, game economics, and problems in economic measurement. He has been quoted by The Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and many other media outlets and publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a Bachelor of Engineering from the U.S. Military Academy at West Point. follow him on Twitter.

Selected Publications

“General Institutional Considerations for Blockchain and Emerging Applications” co-authored by David M. Waugh in Emerald’s Handbook on Crypto Assets: Investment Opportunities and Challenges (coming soon) Editing by Baker, Benedetti, Nyckbacht & Smith (2022)

“Operation Warp Speed” co-written by Edwar Escalante in Epidemics and freedom (coming soon), edited by Raymond J. Marsh and Ryan M. Yunk (2022)

“A Virtual Weimar: Hyperinflation in Diablo III” in The Invisible Hand in Virtual Worlds: The Economic System of Video GamesEdited by Matthew McCaffrey (2021)

“The Fickle Science of Lockdowns” co-authored by Phillip W. Magness, The Wall Street Journal (December 2021)

“How well does the gold standard job work?” Co-author: William J. Luther, SSRN (November 2021)

“Populist Prophets, Public Prophets: Pipers of Lucre, Then and Now” in financial history (summer 2021)

“Boston’s Forgotten Closures” in American conservative (November 2020)

“Private Governance and Rules for a Flat World” in Creighton Magazine for Multidisciplinary Leadership (June 2019)

“The idea of ​​a ‘federal job guarantee’ is expensive, misleading, and increasingly popular with Democrats” in daily business investor (December 2018)

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