Has the U.S. Reached the Hyperinflation Tipping Point?

Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures.

Guess what? The U.S. will hit the 40% mark in 2009:

Hayman Advisors provided a good summary of Bernholz’s research in their October letter (via FS):

There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations – all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.

It’s important to note that the dollar does have some built-in protection as the world’s current reserve currency. That lets us get away with a higher debt-load than we should be able to. The question is, how much protection does that offer?

Also, how long will the dollar remain the world’s reserve currency? As Bloomberg noted, the world’s reserve banks are shifting away from US dollars. They’re shifting to currencies from countries with sound(er) monetary policy and less debt. We’re really in uncharted economic territory.

“It can’t happen here”

Hyperinflation in the US is hard to imagine. It could never happen to us… right? Well, fiat money has always collapsed eventually. I wonder if people in those countries ever saw it coming. My gut says the vast majority never saw it coming, but every case is unique.

Hedging Against Hyperinflation

If we are on the road to hyperinflation, you’ll definitely want to be in commodities. Stocks may do OK, but generally don’t keep up with inflation during hyperinflation. The exception would be commodity producers, such as gold miners. Foreign currency funds are another way to play it. I did a writeup on two mutual funds I like as inflation hedges here.

Jim Rogers likes agriculture plays better than precious metals: Cotton, sugar, etc. I’m mostly using metals to hedge against inflation, but Mr. Rogers’ suggestions certainly warrant a closer look.

If you’re looking to read more on the topic, Peter Bernholz’s research is featured in his new book is Monetary Regimes and Inflation: History, Economic and Political Relationships. Looks interesting, I’ll probably pick one up with my next Amazon order.

Hat tip to Michael Panzner. He has an excellent writeup on the risks here.

Comments

[goldbug101:]

Well, if it is true "hyperinflation" (ala Zimbabwe / Weimar) is coming then civil society within the US will come to an end and there will be mass riots and most likely martial law and forced dusk to dawn curfews.

I don't think the US government would ever let it get to the point of "hyperinflation", rather what will most likely occur will be a prolonged period of high inflation.

Someday a can of Coke will cost $5 or so, high inflation, but "hyperinflation" (ala Zimbabwe / Weimar) for USD isn't gonna happen.

For hyperinflation, that can of Coke will have to cost around $150,000!

Stop tossing around the term "hyperinflation" and instead use the correct terminology - prolonged period of high inflation.

If one really believes hyperinflation will occur ala Weimer or Zimbabwe, then you better have:

(1) Lots of guns & ammo
(2) Basement vault full of actual gold
(3) Lots of MREs and canned foodstuff or live on farmland with livestock
(4) Stockpiles of gasoline and fresh water

Shakespeare said it would start by killing all the lawyers. If true hyperinflation comes to pass, it will be the bankers first followed quickly by the politicians.

Let's recap that fact- "hyperinflation" (ala Zimbabwe / Weimar) for USD isn't gonna happen.

The US will go to war with China before hyperinflation ala Zimbabwe / Weimar takes place.

Oct 15 09:45 PM

[newamericanow:]

Goldbug, It's not a matter of if hyperinflation happens but when. It is coming. The Dollar is steadily becoming worthless. When goods can no longer be bought with US dollars thats when the SWHTF. Energy will be the most important commodity because without energy this country falls into the third world fast. There may be wars over it but how will they be paid for? Soldiers already want to quit because they have no will to fight for the cause of their Gov. However, what you say in your four things that will be needed are true or at least 3. You can't eat gold and if everyone is suffering from the same thing something is only as valuable as someone else says it is. Bullets may be more valuable.

Oct 16 11:40 AM

[tmosley:]

One can't jut wave their hands in the air and say "it can't happen here!"

This type of currency event happens quickly when it is widely held as a reserve currency, as everyone will wind up dumping their dollars all at once. Once that happens, there is no going back, as the high inflation that we SHOULD have been experiencing over the last 20-40+ years comes crashing back onto our shores.

The effect of a war with China would be the same, as either way we wouldn't have access to their manufacturing base. The only difference would be that what little remains of OUR manufacturing base would be a twisted mass of molten metal and glass as China unleashed their nuclear counterattack. War with China is nothing more than murder-suicide.

Oct 16 01:57 PM

[Celtic Hammer:]

"Paper money eventually returns to its intrinsic value --- zero."

Voltaire

Our economic situation in the U.S. has been unjust and unconstitutional since 1913. Since then, notably in 1933, 1965 and 1973, tyrannical actions have been taken that have put us all in the poor house. The whole sytem has to go, and all those that were complicit with managing the system must be put on trial, and punished severely.

Oct 16 05:05 PM

[Mark D:]

goldbug says "I don't think the US government would ever let it get to the point of "hyperinflation...""
That statement implies the government would have to stop bailing out everyone and reduce the money supply to the actual level of economic activity - which is EXACTLY what they did in the 1930's, which resulted in the depression. You are implying a 180 degree turn in policy. Is that realistic? Bernanke won't do it... Is that even poltically tenable?

A prolonged inflationary period assumes the government can control this problem...do we really think they can?

Oct 16 05:59 PM

[Connecticut:]

I don't know about Venezuela type 30% inflation. But I think prolonged 15% inflation is a very real possibility. With the weakening dollar gas at the pump is sure going to go through the roof. I think we hit $15 at the pump in the next 5 years.

Oct 17 09:26 PM

[Carousel:]

Goldbug
1) your analysis of inflation/hyperinflation based on your arbitrary future pricing of coke (soda) is useless.

2) isnt a safe full of gold is always nice to have?

3) gasoline is not good for stockpiling.

4) Where would the US borrow the $ to go to war with China? from China?

5) you are a troll


On Oct 15 09:45 PM goldbug101 wrote:

> Well, if it is true "hyperinflation" (ala Zimbabwe / Weimar) is coming
> then civil society within the US will come to an end and there will
> be mass riots and most likely martial law and forced dusk to dawn
> curfews.
>
> I don't think the US government would ever let it get to the point
> of "hyperinflation", rather what will most likely occur will be a
> prolonged period of high inflation.
>
> Someday a can of Coke will cost $5 or so, high inflation, but "hyperinflation"
> (ala Zimbabwe / Weimar) for USD isn't gonna happen.
>
> For hyperinflation, that can of Coke will have to cost around $150,000!
>
>
> Stop tossing around the term "hyperinflation" and instead use the
> correct terminology - prolonged period of high inflation.
>
> If one really believes hyperinflation will occur ala Weimer or Zimbabwe,
> then you better have:
>
> (1) Lots of guns & ammo
> (2) Basement vault full of actual gold
> (3) Lots of MREs and canned foodstuff or live on farmland with livestock
>
> (4) Stockpiles of gasoline and fresh water
>
> Shakespeare said it would start by killing all the lawyers. If true
> hyperinflation comes to pass, it will be the bankers first followed
> quickly by the politicians.
>
> Let's recap that fact- "hyperinflation" (ala Zimbabwe / Weimar) for
> USD isn't gonna happen.
>
> The US will go to war with China before hyperinflation ala Zimbabwe
> / Weimar takes place.

Oct 18 01:59 PM

[solar jim:]

The definition used by most economists for hyperinflation is "an inflationary cycle without any tendency toward equilibrium."

Now, you don't have to have 3000% per year inflation for that. It simply implies that the level of inflation is growing and not stabilizing and each iteration of the cycle of money printing to pay bills causes it to ratchet up further.


On Oct 15 09:45 PM goldbug101 wrote:

> Well, if it is true "hyperinflation" (ala Zimbabwe / Weimar) is coming
> then civil society within the US will come to an end and there will
> be mass riots and most likely martial law and forced dusk to dawn
> curfews.
>
> I don't think the US government would ever let it get to the point
> of "hyperinflation", rather what will most likely occur will be a
> prolonged period of high inflation.
>
> Someday a can of Coke will cost $5 or so, high inflation, but "hyperinflation"
> (ala Zimbabwe / Weimar) for USD isn't gonna happen.
>
> For hyperinflation, that can of Coke will have to cost around $150,000!
>
>
> Stop tossing around the term "hyperinflation" and instead use the
> correct terminology - prolonged period of high inflation.
>
> If one really believes hyperinflation will occur ala Weimer or Zimbabwe,
> then you better have:
>
> (1) Lots of guns & ammo
> (2) Basement vault full of actual gold
> (3) Lots of MREs and canned foodstuff or live on farmland with livestock
>
> (4) Stockpiles of gasoline and fresh water
>
> Shakespeare said it would start by killing all the lawyers. If true
> hyperinflation comes to pass, it will be the bankers first followed
> quickly by the politicians.
>
> Let's recap that fact- "hyperinflation" (ala Zimbabwe / Weimar) for
> USD isn't gonna happen.
>
> The US will go to war with China before hyperinflation ala Zimbabwe
> / Weimar takes place.

Oct 19 02:15 PM

[CarlB:]

Anyone who insists that we're headed for "hyperinflation" doesn't understand our credit/debt based 'monetary' system. I think the primary reason people get so confused over this subject is because supposed experts continually to use words and descriptives that are either out of context or totally misleading, like 'printing' and 'dollar'.

In a credit/debt based monetary system, like ours, the 'dollar' is little more than a Unit Of Measure, like inch and mile or cup and gallon. How do you hyperinflate a unit of measure?

To insist that government can hyperinflate credit is the same as saying they can amass an infinite amount of debt and we know that’s not true. No one, not even our government, can create credit absent debt and debt will own everything in the end.

The only exception to that rule being the Federal Reserve an all the other banksters who create all credit out of thin air to 'loan' at interest to governments and the rest of us willing debt slave shmucks.

Oct 21 12:20 PM