With the Federal Reserve printing trillions of dollars and the governments sending out free money to citizens, fears of a possible hyperinflation rise in the U.S.
In the past weeks, the Federal Reserve has injected trillions of dollars into the market and lowered the interest rates to almost zero. With the government also stating that it will begin to send out free money to its citizens, we need to ask ourselves the question if hyperinflation — as seen in countries like Germany after WWI or in Venezuela in recent years — is starting to become a possibility in the United States as well.
What is hyperinflation?
While inflation is the normal decrease in buying power that fiat currencies experience — and need to experience for the sake of the economy — hyperinflation is a different story.
There’s no true numerical definition of it but many economists would agree that a rise in prices by 50% per month would qualify as hyperinflation.
Imagine it that way: Let’s say a loaf of bread costs you 2.50$ currently. At hyperinflation of 50% per month, two years later you’d pay 42,085.28$ for a similar loaf.
If that sounds bad, consider the hyperinflation that Venezuela has experienced in the past years. In 2019 the annual inflation rate was estimated to be 10,000,000% by the IMF, which was later confirmed.
Let that sink in. If you had 10,000,000 USD in your bank account and the dollar experienced the same hyperinflation, you couldn’t even buy half a loaf of bread with the same amount of money one year later.
This time it’s different
Comparing the current situation to the last economic crises we had, we can find an important difference.
The global economic crisis of 2008 was caused by a general recklessness in behavior by the banks and their allocation of loans. In simple terms: People who should not have been given loans were given them.
When the housing bubble burst those homeowners were trapped because, on the one hand, they could not pay back their loans and on the other hand, through the vast difference of supply and demand on the markets they could not sell their houses either.
Banks defaulted on their loans and needed to be bailed out by government intervention.
The last big bubble before that — the Dot-com bubble in 2001 — happened because of reckless investing in worthless companies. Millions were IPOed into companies that were meant to sell chocolate online, for example.
When it became clear that many of these companies were not worth the price they were trading at, the bubble collapsed.
It was a very similar thing with the crypto bubble and the ICO mania of 2017.
But the recession we are currently sledding into is a different kind of beast, because it started due to a different reason.
While the last economic crises were initiated by the reckless behavior in the financial sector and pulled down the rest of the economy afterward, this time it’s the other way around.
We have an economy that’s grinding to a halt and that’s pulling down the financial sector as a result.
While last time economic measures — such as printing money and injecting into the market — worked because they tackled the problem at the root, the big question now is if reviving the economy is possible with the same measures, even if the cause for the crisis is a different one.
In short: We are used to economic crises being caused by the financial sector and therefore know how to fight fire with fire.
But this time, it’s a flood.
For comparison: the crisis in Venezuela started in 2010 when president Hugo Chávez declared an “economic war” after a shortage in supply of essential goods such as food. This resulted was an economic crisis far worse than the Great Depression in the United States in the 20s.
How we are tackling this crisis
While this might all sound extremely concerning it might not be the end that many people are forecasting.
Looking at the data we get from the outbreak in China and seeing that they are slowly restarting their economy after about 3 months of hibernation due to the breakout of Covid-19 — let’s forget the possibility of a second wave of infections due to those measures for now — means that an end is likely in sight.
But the fact that the Federal Reserve is basically shooting this crisis now with every gun it has is definitely concerning.
With interest rates at zero percent, we are with our backs against the wall. While negative interest rates are possible, it would mean that citizens would be punished for holding money in their bank accounts.
This could lead to a bank run with people cashing out because holding the 100$ bill at home would make more sense than watching pieces being chopped off a digital 100$ bill.
In the end, nothing would be achieved because in a society that relies on cash the interest rates would be back at zero. Cash just doesn’t pay interest, neither positive nor negative.
“The value of the fiat money that we use in our everyday transactions depends on market confidence in the long-term economic prospects of our society.” — Andrew Wurtis
The question is what happens when the current crisis drags on? There is already a shortage of supply in some areas — we’ve all seen the videos of people fighting over toilet paper in the stores — and that won’t change if this crisis were to get worse or continues for a longer time.
[…] if markets realize that the US economy has become addicted to monetary stimulus and “can’t get off the drug”, then expectations for the long-term path of the monetary base will be revised up leading to what could be the most severe inflationary outbreak in modern US history.
Ultimately, determining the risk of hyperinflation in the United States comes down to a call on the “real health” of the US economy. Is the US economy an innovation machine that will grow solidly as the monetary base is reduced? Or is the US economy merely a house of cards supported by cheap debt? — Andrew Wurtis
So what are we looking at now? Were all the preppers right and our society is about to collapse?
I don’t think so. But I do consider a deflation, followed by a hyperinflation — while currently not very likely — a possibility.
The question remains what happens if this unlikely situation should hit. A global reserve currency hyperinflating isn’t the best possible forecast for the global economic system we could get and it’s definitely not going to be fun.
People are talking about returning to the gold standard, others say that cryptocurrencies like Bitcoin will take over and then there’s always the chance that the role of a global reserve currency is being taken over by a different currency like the Renminbi… or toilet paper.
After all, the dollar has acted as such for about a hundred years and history has shown, that this is about the average life-span of a global reserve currency.
For now, let’s hope the actions of the world’s central banks will have an impact and we’re not just trying to get a dead horse to get up and start running by repeatedly beating it with a stick.
Stay safe my friends, practice #socialdistancing and act smart financially. Money can be made when there’s blood on the street and if you help the economy by avoiding social gatherings for a while you might not only help in keeping our economic system afloat but also benefit financially from the opportunities that present themselves in these times of turmoil.