One of the most melodramatic predictions often made about the US economy is that we'll see hyperinflation and the extremely quick collapse of the US dollar. This is hogwash.
I've written in the past that I think the dollar is doomed and won't be the reserve currency that it currently is in another 10 or so years.
Everything can change in a decade, especially with the trend the world is taking toward pushing away from the dollar and going toward the Yuan, the Yen, and almost every alternative they can find, as Marin Katusa wrote in The Death of the Dollar.
So don't take this article as a pro-fiat, pro-Fed article -- it's not. But first, let's talk about why hyperinflation has so far been completely impossible and hasn't come close to occurring in the last few years.
What Causes Hyperinflation
Hyperinflation is caused when inflation hits a point where it makes more sense to spend money quickly because prices will be up so much in the short run that you will suffer if you hold on to cash. When we hit "hyperinflation" instead of "high inflation" is kind of arbitrary, though Philip Cagan's understanding of it is when prices go up 50% or more per month.
This is very rare for currencies, even paper currencies. If inflation hit 40% per year for the dollar, it wouldn't even meet this level of inflation -- though, like I said, it's kind of an arbitrary number. Still, by essentially any standard, the US has not had hyperinflation for at least two centuries. It just hasn't happened. The dollar is getting weaker by the year, but people still like cash and flood to it when times get rough.
This is kind of embarrassing for some people, including people I love and respect -- like Austrian economists who have often predicted inflation hitting insane levels. Ron Paul predicted hyperinflation "very soon" way back in the 1970s -- it's been almost 4 decades, and it hasn't happened.
Why Hasn't There Been Hyperinflation
Plenty of people have been predicting hyperinflation their whole careers. Others just recently started making the prediction.But why hasn't it happened over the last few years? The reasons are pretty simple.
1. Inflation is more than just printing money.
Inflation isn't just when there's more money in existence. It's when money actually is part of the money supply in circulation -- it has to be in circulation. If I print a trillion dollars and send it to the moon, there won't be any inflation because I might as well have not printed it.
The same goes for the economy. If money is "sitting" on balance sheets somewhere, or isn't being put into the system in the same way money is being utilized elsewhere in the economy, then the impact isn't there in the same way. This is unavoidable.
This is also a good example of why the quantity theory of money is at least a little flawed -- the number of something doesn't matter until that something is actually being put to use.
This is true on steroids when it comes to hyperinflation. In the history of past hyperinflationary events, the governments didn't just print a bunch of money one time and stop -- they continued to print even after the price inflation began to kick in.
The US is likely to be very different, and I don't say that to somehow defend the US government. In 1980, for example, the Fed was able to essentially stifle inflation by doubling interest rates. The same would likely occur if inflation begins to pick up speed fast -- there simply aren't enough crazy people in the Fed to not fight inflation if it actually became a near-hyperinflationary problem.
The scary thing out of the Fed's control is fiscal policy, and that's where almost all concern should lie. Even Helicopter Ben has pointed out repeatedly that fiscal policy is where the real danger lies, whenever the US spends more than it earns. But even then, the chances of actual hyperinflation are incredibly slim, because even a "bad" level of inflation like 10% would greatly eat away at the debt.
This is a very basic aspect of the national debt that plenty of people either skip or ignore -- the inflation the debt causes also erodes the debt. The debt is literally being monetized. It's not good, of course, but it's a huge, giant bumper on hyperinflation.
The biggest enemy of a national-debt caused hyperinflation is the high inflation that the debt will likely cause in the first place. This is why there have been so many "national debt will kill us all" books written over the past decades, and none of them have come close to being correct in their predictions.
The national debt is bad, yes, because it distorts the economy. But the sheer amount that would be necessary to trigger hyperinflation would make the current spending look like chicken feed.
2. Credit is money, and it got bloody tight.
This is especially true when it comes to credit. In our economy, credit flow is essentially inherent to capital flow. And even with the record low interest rates, the money isn't being lent out nearly fast enough to be even highly inflationary, much less hyperinflationary.
This likely won't change anytime in the near future. It could take another decade for our credit-creating machine to finally create enough to be of concern for inflationary reasons. The malinvestments that are created with artificially low interest rates are an important deal, of course, but that's a different topic than hyperinflation itself.
And don't forget, this is something the Fed can almost directly control within a year or so -- shooting for a huge spike in interest rates could drastically cut the amount of credit being created in the system, which would severely undercut inflation as well as hyperinflation.
So What Would it Take?
It would likely take a very, very huge event to make the dollar collapse via hyperinflation. We'll see inflation, and we'll likely see the world try to move beyond the dollar as a reserve currency. We'll likely have fiscal problems in the future.
But hyperinflation just isn't in the cards, unless some sort of world war or massive regime change occurs -- and none of that seems inevitable, at least not based on what we can see in the news or data we have available.
This doesn't mean you should just dump your money into a non-inflation-hedged portfolio. Portfolios with plenty of gold like the permanent portfolio are great -- just don't expect a movie-like dollar crash.
In the end, I wrote a few weeks back that Keynes is dead and so are the policies trying to impliment his ideas. They've failed. Over and over. Don't take what I'm saying as some sort of pro-Fed argument -- I'm not. I'm just being honest about what the future likely holds.