Why hyperinflation wont happen

Bolivia's slowing exports scared away its lenders. Suddenly, Bolivia had to start paying back its mountain of debt. The Cliff Notes version of how to avoid hyperinflation is not to print too much money. The more you print today, the more you'll need to print tomorrow. Skip to content Site Navigation The Atlantic. Popular Latest. The Atlantic Crossword.

Sign In Subscribe. The political consequences were worse. Even before you-know-who took power. Bolivia couldn't afford to pay back its foreign creditors and spend on its own people. The government decided that the easiest way to prioritize was not to prioritize. Rather than cutting spending or hiking taxes, they would pay for everything thanks to the magic of the printing press. It was easy, but -- spoiler alert! Inflation spiked to 11, percent, on an annual basis.

More currency chasing the same amount of stuff makes the money worth less. As a result, you need to print even more just to tread water. This is what separates hyperinflation the examples above from merely bad inflation the s in America.

Hyperinflation isn't always just a matter of government incompetence. It's a matter of desperation. It typically begins with an economic implosion.

War and revolution are the usual suspects -- or, in Zimbabwe's case, an ill-advised land reform. The economic collapse begets a collapse in tax revenues. Perversely, this makes the government look like a terrible credit risk. Cut off from international lenders, the government is left with a gaping hole in its budget, and no way to fill it.

The choice is between pain today from austerity or pain tomorrow from printing money. It gets worse. These governments usually have piles of foreign debt to pay off, too. Whether it's from reparations or excessive borrowing doesn't matter so much. What matters is that big chunks of what cash the government does have is earmarked for foreign creditors.

That's politically toxic in a society going through a collapse. For politically weak governments, the temptation to substitute an inflation tax for actual taxes is enormous. Of course, we all know how this story ends. Much, much more money chasing much, much fewer goods sends prices into the stratosphere.

How are the United States' historic budget deficits, money-printing and depressed economy any different from the country's that have experienced hyper-inflation? The three-part answer is: 1 we don't have any problems selling our debt; 2 we aren't actually printing money; and 3 the United States is a highly productive economy that is nothing like bombed-out Budapest. Let me unpack these one by one. Right now getting the markets to buy our debt isn't the problem.

Getting enough debt for the markets to buy is the problem. Investors are so crazy to load up on Treasuries that they're actually paying us to borrow, taking inflation into account. But while we're currently getting free money from investors, Hungary circa was getting no money.

I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Understanding Inflation. Types of Inflation. What Does Inflation Impact? Understanding Hyperinflation. Understanding CPI. Related Terms A-I. Related Terms J-Z. Economics Macroeconomics. Table of Contents Expand. The Monetary Base. The Bottom Line. Key Takeaways Prices did rise modestly in the low-interest rate environment that followed the Great Recession, but not nearly enough to be considered anything close to a hyperinflation.

Hyperinflation is an exponential rise in prices and is generally associated with a collapse in the underlying economy. During the Great Recession banks still had bad loans and toxic assets on their balance sheets as a result of the housing bubble burst and its aftershocks. While the central bank did increase the money supply sharply, banks used these funds to shore up their balance sheets and buffer toxic assets, rather than creating new loans.

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Related Articles. Federal Reserve Open Market Operations vs. Monetary Policy Quantitative Easing vs. Currency Manipulation. Partner Links. The IMF recently announced that it expects Venezuelan inflation to reach 1 million percent by the beginning of , up from an estimated 13, percent this year. Venezuela is no longer just flirting with hyperinflation — it is plunging in all the way. Hyperinflation is frightening. The most widely watched measure, the Consumer Price Index, is already a bit above that, at 2.

John Williams, who makes a living stoking inflation fears with his blog ShadowStats , claims the true rate is running over 10 percent, and rising. ShadowStats is nonsense , but although there is no panic, it appears that officials at the Fed itself are increasingly recognizing the need to tap the brakes before things get to the point where it has to slam them on hard. Despite these signs of upward pressure on prices, however, few observers see any danger of hyperinflation here.

To see why America will not be the next victim, we need to understand more clearly what is going on in Venezuela. Read on. Hyperinflation has a long history, but no official definition. In an influential paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14, percent.

That would fit extreme cases like Weimar Germany after World War I, Hungary after World War II, or, earlier in this century, Zimbabwe, where inflation reached an immeasurable rate of perhaps as much as septillion percent per year before it ended. But these are extreme cases. As a practical matter, we can apply the term hyperinflation to any case in which inflation is fast enough to seriously undermine the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange.

That can begin to happen at much lower rates of inflation. Such a definition would be applicable in cases like Russia, Argentina, and Bulgaria in the s, even though inflation in those countries reached only the low thousands of percent per year, well short of 50 percent per month.

As the following chart shows, Venezuela is just now breaking through into Cagan territory, although it has had many of the symptoms of hyperinflation for several years already. So, where does hyperinflation come from? Velocity is the least familiar term. Intuitively, we can think of it as the rate at which the stock of money circulates through the economy. Defining velocity as the ratio of nominal GDP to the money stock makes it clear that the equation of exchange is a simple accounting identity that has no inherent causal interpretation.

I like to call this version of the equation of exchange the inflation accounting equation. The inflation accounting equation does not tell us what sets off any particular episode of hyperinflation.

However it starts, though, the explosive character of hyperinflation comes from a set of three feedback pathways that link the variable P, on the left-hand side of the inflation accounting equation, to the variables M, V, and Q on the right-hand side.

The feedbacks mean that not only does the rate of inflation depend on the rate of change of M, V, and Q, but that the rates of change of those three themselves depend on the rate of inflation.

The first feedback pathway, the one that acts through velocity, arises from the function of money as a temporary store of value. If you get your pay on the first Friday of each month, you can put some cash in your pocket and spend the money on gas and groceries at any time during the month as you see fit.

Hyperinflation undermines the store-of-value function because it causes money to lose a noticeable amount of purchasing power over even a few days. During a period of hyperinflation, instead of putting your pay in your pocket, it is best to run out and spend it quickly before prices go up. The velocity at which money moves through the economy increases accordingly. Economists call this behavior asset substitution.