Is Hyperinflation Coming?
A few weeks ago, on the heels of the highest inflation reading in 30 years (5.9%), Jack Dorsey, the founder of Twitter and Square, tweeted the following.
It instantly sparked a lot of concern, and then debate. Exactly what is “hyperinflation” and are we heading toward it?
To start, hyperinflation is generally agreed to be a constant 50%+ increase in inflation every year for multiple years. It completely destroys the value of the local currency and generally has devastating consequences. The most famous example is that of the Weimer Republic in Germany after WWI. At the height, the cost of a loaf of bread was doubling in price every few days and many went hungry. A more recent example in the mid-2000s took place in Zimbabwe when the local government funded the war by printing endless amounts of money. At the height, that same loaf of bread was doubling almost every day.
The only time the US has ever experienced anything close to hyperinflation was during the Civil War era. As bad as the 1970s were in the US, it was nothing close to hyperinflation. And that’s important to note because historically hyperinflation occurs during extreme geopolitical events like wars or regime changes - not simply from “printing money” (taking on debt) like we are seeing in the US now.
Many, myself included, are concerned about the speed at which the Federal Reserve is printing money to pay for our national expenses. Can this lead to higher than average inflation? Yes. But has it historically led to hyperinflation? No. Hyperinflation is unlikely in this environment because there are several big themes playing out that are actively combating inflation at the same time.
1) Technology innovation puts major pressure on inflation since the cost of these goods rapidly declines every year. Think about how much you paid for your TV in 2000. I bet it was substantially more than the TV sitting in your living room now. The same is true for computers, software, internet, etc.
2) Aging populations that are not spending as much and therefore drive down demand for goods, putting downward pressure on prices.
3) Globalization has made it possible to find the cheapest provider for goods and services, wherever they are in the world. This is why so many of the goods in our homes say “Made in China.”
Because of these longer-term themes, I expect that we will see only moderately higher inflation for the next few years before it begins to taper off again.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.