Our friend Vince of the website “how fiat dies” has a long history of predicting hyperinflation in the USA. I’ve taken the other side of this position for as long as I’ve studied economics and I’ve been quite publicly vocal about it for 5 years now. But the past is the past. But Vince is not giving up on his prediction. So he asked me to answer three of his questions on hyperinflation. My hope is that we can all arrive at a better understanding of hyperinflation from this discussion. So here goes:
Vince asks: 1) In Hyperinflation Explained in Many Different Ways I would like him to respond to the section, Modern Monetary Theory and Monetary Realism.
Vince asserts that MR says hyperinflation is a political phenomenon. He also claims that we “do not seem to have any ability to predict hyperinflation ahead of time” and “These two theories do not seem to help at all in warning when hyperinflation might start nor in really understanding how it works.” He then claims “In these theories government bonds are part of the money supply.” He then claims “However, the more bonds [the government] make the more prices go up.”
Let’s touch on each one. First, I can’t speak for the MMT people so let’s leave them out of this. I have studied hyperinflations in extensive detail and have found that they tend to have trigger events. That tends to be:
- 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.
Is that necessarily always true? No. But when we study the root cause of hyperinflation I think there’s a tendency to assume that hyperinflation is just too much money chasing too few goods, but that misses the point. Most often, the “too much money” or “too few goods” part has a specific cause. Historically, the aforementioned 5 triggers have tended to coincide with hyperinflation.
Vince then claims that MR cannot predict hyperinflation and offers no aid in warning about hyperinflation. I wouldn’t claim to be able to predict when hyperinflations will occur and where, but I have been 100% right on the risk of hyperinflation in the USA over the last 5 years. So while I may not be able to predict hyperinflations everywhere at all times, I have a pretty good track record so far in the country I reside. Vince cannot say the same about his track record. So, I would say I actually have a pretty good record predicting hyperinflation in the USA….
His claim that MR views government bonds as part of the money supply is not correct. This is an MMT position that I strongly disagree with. In MR, T-bonds are securities issued to obtain something of higher moneyness (bank deposits). T-bonds are financial assets issued by the government for a very specific purpose due to a specific institutional structure of the monetary system. If T-bonds were “money” then there would be no need to issue them in the first place. Clearly, T-bonds serve some other purpose and are issued to allow the government to credit its accounts and then subsequently redistribute a bank deposit into someone else’s bank account. This is extremely similar to corporate bond issuance although T-bonds are of a higher quality than corporate bonds because of the government’s enormous taxing authority.
Lastly, does T-bond issuance cause inflation? I don’t know. Does corporate bond issuance cause inflation? Does corporate stock issuance cause inflation? Does loan issuance cause inflation? I personally think there’s a lot more to inflation than merely studying the money supply or financial asset supply. Over the course of history, we should expect the supply of money AND financial assets to increase as borrowing increases and assets are issued to invest and spend. Whether this ends in high inflation requires a more in-depth study than merely looking at the quantity of assets in existence. If we just assumed that “more money = inflation” then every loan that creates money would be inflationary. But that wouldn’t tell us anything useful about the impact of that loan on the economy. It’s not about whether the loan was issued. It’s about how the loan was used to benefit the real economy….
Vince continues: “Can’t we wait till there are signs of inflation before doing anything?”
I would argue that hyperinflation is the result of some political or structural problem with the economy. For instance, if you have a highly unproductive economy with high inflation and the government decides to start firing dollar bills outside the front doors to finance its spending then you’re probably staring down the barrel of hyperinflation. But again, understanding the trigger of the hyperinflation is not just about understanding the money creation, but also about understanding the underlying structural problem in the economy that makes hyperinflation a high probability event.
Lastly, Vince asks: “How is hyperinflation stopped?”
That depends on the cause. I think Vince has the tendency to assume that hyperinflation is always caused by government spending, but that doesn’t go far enough in my view. The government spending is usually a misguided response to something else. If you want to argue that hyperinflation is often the result of government ignorance then that’s fine by me. But we shouldn’t paint with such a broad brush here. Different hyperinflations have different causes. If I were a surgeon I would never walk into the operating room and simply say “this man is dying, how can we stop it”. I would say, “this man is dying, what is causing this?” If you want to know how to stop a hyperinflation you need to know what has potentially caused it. So, I don’t think Vince is asking the right question. Maybe he’d like to follow-up with one in the comments?
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.