One of the bigger myths in the world of economics and finance remains the cause of hyperinflation. As I’ve highlighted many times over the years, hyperinflation is more than just a monetary phenomenon (and misunderstanding this led to many incorrect hyperinflation predictions in the USA in recent years). In fact, the monetary explosion is almost always the result of some other rare or extreme exogenous factor. My original conclusions on this found that hyperinflations tended to occur around the follow events:
- Collapse in production.
- Rampant government corruption.
- Loss of a war.
- Regime change or regime collapse.
- Ceding of monetary sovereignty generally via a pegged currency or foreign denominated debt.
These events usually lead to a collapse in the tax system or expansion in deficits that appear like the cause of the hyperinflation when the reality is that the debt increase is always the result of some rare or extreme exogenous event. And let’s be clear – when we say “rare” we mean really rare. As in wars that destroy countries, regime changes that shift entire countries, corruption that destroys an economy, ceding of monetary sovereignty in the use of a currency peg or foreign debts, or a collapse in production.
Anyhow, it was kind of nice to see a paper by the Cato Institute noting that hyperinflations tend to “arise under extreme conditions” as opposed to the usual “money printing” conclusion:
“Hyperinflation is an economic malady that arises under extreme conditions: war,
political mismanagement, and the transition from a command to market-based economy –
to name a few. In each of these circumstances, there are barriers to the recording and
publication of reliable inflation statistics. As we discovered over the course of our
investigation, overcoming these barriers was an arduous and painstaking process. In light
of this, it is little wonder that no one has been able to fully and accurately document
every case of hyperinflation.”
It’s nice to see that some people are beginning to connect the dots and make earnest attempts to understand why hyperinflation didn’t happen in the USA. Of course, if you don’t understand the basic operational realities of the monetary system then you likely can’t even begin to piece together the dynamics behind the recent lack of hyperinflation in the USA so if you’re bored on a Friday you might want to peruse this document first.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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