Wednesday, October 17, 2012
There has never been a case of gold-denominated hyperinflation in history, yet there have been plenty of cases of fiat-denominated hyperinflation. This suggests that hyperinflation is a function of governments running the printing presses. Of course, no government intentionally destroys its own credibility. So why would a government end up printing to oblivion?
Mostly it occurs during severe physical shocks: countries are not producing enough food; manufacturing and energy generation are cut due to political and social turmoil; access to import markets is cut. Increases in money supply that occur without a corresponding increase in productivity lead to astronomical relative inflation as productivity falls, and the money supply simultaneously soars.
It may seem easier to pay workers, lenders and clients of the welfare state in heavily devalued currency than it would be to default on such liabilities. But rejecting the printing press does not make underlying problems disappear, so currency printing may be a last roll of the dice, the last failed attempt at stabilizing a fundamentally rotten situation.
The indicators for imminent hyperinflation are more geopolitical that economic: wars, trade breakdowns, energy crises, socio-political collapse, collapse in production, collapse in agriculture. While all such catastrophes have preexisting economic causes, a bad economic situation will not deteriorate into full-collapse and hyperinflation without a severe intervening physical breakdown.
Some predictors of a hyperinflation: Rising public and/or private debt; import dependency; energy dependency; fragile transport infrastructure; overstretched military; natural disasters; and civil disorder.
If an incident or series of incidents leads to a severe and prolonged drop in productivity, and so long as government accelerates the printing of currency to paper over the cracks, hyperinflation is a mathematical inevitability.
Posted by Unknown at 9:28 AM