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“Inflation is always and everywhere a monetary phenomenon.” – Milton Friedman

Hyperinflation is poorly understood. As its name might imply, most people believe hyperinflation is merely inflation on steroids. But that’s not necessarily accurate. Inflation can and does occur in a perfectly healthy economy. In fact, since 1913 when the Fed was founded inflation in the USA has consistently risen at 3.5% per year on average. One might assume that this means the country has experienced some great injustice, but the truth is that the 1900’s were characterized by the greatest economic expansion and wealth creation the world has ever seen. Despite the common citation that “the $USD has lost 90% of its value” Americans experienced an unprecedented period of prosperity during this inflation. In fact, the prosperity became so gross in the 1990’s that Americans felt entitled to second homes, second cars, and just about every other luxury good known to man. What has not occurred is hyperinflation, which is a very different animal than inflation. Hyperinflation is a disorderly economic progression resulting from exogenous and unusual events that lead to rejection of the sovereign currency.

Contrary to popular opinion, excessively high deficit spending and exorbitant government debt levels are not the actual cause of a hyperinflation. In most cases they have been the result of other exogenous events such as ceding of monetary sovereignty, war, rampant corruption or regime change. It is these exogenous events that result in the public’s rejection of the currency, a collapse in the tax system and the government response of printing more money to fill in the confidence void. Ultimately the confidence void cannot be filled and the currency is fully rejected by the public in the form of hyperinflation.

In my treatise on the monetary system I discuss the importance of this unspoken agreement between the private sector and public sector:

“What backs these notes we created? What gives them value? Ultimately, these notes represent some amount of output and productivity. The notes in and of themselves have no intrinsic value, but serve as a medium of exchange that allows the citizenry to exchange various goods and services. The willingness of the consumers in the economy to use these notes is entirely dependent on the underlying value of the output and/or productivity and my ability to enforce its usage. The government cannot force its value on its citizens. The value of these notes is ultimately determined by the goods and services that are produced by the citizens and the value that other citizens are willing to pay for these goods and services. Therefore, government has an incentive to promote productive output. Otherwise, they risk devaluing the currency. Paying its citizens to sit at home doing nothing, buy cars they don’t need or purchase homes they can’t afford are unproductive forms of spending (sound familiar?). If government is corrupt in its spending and becomes an institution that is mismanaged and detracts from the private sector’s potential prosperity then it is only right that the citizens revolt, denounce the sovereign currency and demand change.

The United States Secret Service was in fact created specifically for this purpose – to protect the US Dollar. There is arguably, nothing more important to government stability than maintaining the value and faith in the sovereign currency. As long as an economy is productive, the sovereign nation can enforce the use of said currency, and as long as we don’t issue excessive currency there should always be demand for it. In other words, trust in the national currency is safe as long as the rule of law is maintained, corporations are productive and I maintain my ability to tax you. If my government becomes corrupt, spends well in excess of productive capacity or mismanages the economy then there is an increasing chance of currency collapse (hyperinflation). In essence, this occurs when the citizenry lose faith in the sovereign currency and slowly refuse to transact and produce in that currency.”

The users of the currency can always reject that currency. And I believe they should reject the currency if it is not being utilized in a manner that furthers private sector prosperity. This rejection occurs in the form of a collapse in the tax system. When the sovereign loses the ability to tax the game is up. This occurred in Russia in the 90’s, in several Euro nations in the 1920’s (no, Weimar was not the only country that suffered hyperinflation) and most notably in Zimbabwe in recent years.

A Historical Review

A quick review of the modern economic cases of hyperinflation show striking similarities. Most notably, they involved war (the losing end of a war), regime change or foreign denominated debt. All resulted in catastrophic hyperinflations.

(Figure 1)

But it’s important to note the cause and effect here. These hyperinflations were not merely monetary events. It was not just “high inflation” or excessive government spending. It was a full blown rejection of the sovereign currency. This is a dramatically different set of circumstances than a gradual increase in inflation or a consistent inflation. The citizens rejected the currency due to these exogenous events.

But why does the hyperinflation occur? As I mentioned above it generally occurs due to extreme exogenous events. Hyperinflations have generally occurred in nations with rampant corruption, war, productive collapse, or other extreme exogenous factors. The “money printing” that generally results is not actually the cause of the hyperinflation. It is merely the result of this exogenous event.

The Case of Weimar

The Weimar Republic is the most notable hyperinflation. But it was not the only case of hyperinflation that occurred in Europe at the time. In fact, several European nations were ravaged by the war, war reparations and regime changes that ensued. In the case of Weimar the country was already in a fragile state after Germany lost WWI. To add insult to this injury the allied nations demanded punitive war reparations resulting in foreign denominated debt. Mises elaborated on the insurmountable pressures this caused for Germany:

“The German government has no alternative way of covering its reparations obligations. It would have no success if it tried to raise the sums demanded by issuing bonds or raising taxes. Given the way matters currently stand with the German people, a policy of compliance could not count on the stand with the German people, a policy of compliance could not count on the consent of the majority if its economic consequences were clearly understood and they were not deceived as to its costs. Public opinion would turn with elemental force against any government that were to try to fulfill the obligations undertaken toward the Allied Powers completely.” (Mises 1923, p. 31)

In his excellent book, “When Money Dies” Adam Fergusson described how hyperinflation is more a psychological event than a purely monetary event:

“To ascribe the despair entirely to inflation would be misleading. Undoubtedly, though, inflation aggravated every evil, ruined every chance of national revival or individual success, and produced the conditions in which extremists could raise the mob against the state. It undermined national resolution when simple want might have bolstered it.

Money is no more than a medium of exchange. Only when it has a value acknowledged by more than one person can it be used. Once no one acknowledged it, the Germans learnt, their paper had no value. The discovery that shattered their society was that the traditional repository of purchasing power had disappeared and that there was no means left of measuring the worth of anything.

When life is secure, society acknowledges the value of luxuries, those enjoyments without which life can proceed but which make it much pleasanter. When life is insecure, values change. Without warmth, a roof, or adequate clothes, it may be difficult to sustain life for more than a few weeks. Without food, life can be shorter still. At the top of the scale, the most valuable commodities are water and air. For the destitute in Germany, whose money had no exchange value, existence came very near these metaphysical conceptions. It had been so in the war. In All Quiet on the Western Front, Müller died ‘and bequeathed me his boots—the same that he once inherited from Kemmerick. I wear them, for they fit me quite well. After me, Tjaden will get them: I have promised them to him.'”

In the above quote from “When Money Dies”, Fergusson was describing the depression that arose in the Weimar Republic in the 1920’s when they suffered their hyperinflation. The Weimar Republic was a war torn region with a government in turmoil. Economic upheaval compounded the problems as the war reparations from the Treaty of Versailles and the foreign occupation of the Ruhr placed severe strains on the Republic’s ability to prudently manage their domestic economy/finances. All of this combined to create a scenario that was highly unusual and combustible. German Financier Carl Melchior nicely summed up the situation in Germany in 1921:

“We can get through the first two or three years with the aid of foreign loans. By the end of that time foreign nations will have realized that these large payments can only be made by huge German exports and these exports will ruin the trade in England and America so that creditors themselves will come to us to request modification.”

Melchior was ultimately proven correct as the global economy collapsed in spectacular fashion in the late 20’s. But the hyperinflation was well underway when Melchior spoke these famous words and it was not solely due to the government printing presses, but rather a complex (and unusual) series of events that reduced private sector aggregate demand, shattered the public’s faith, led to extreme government intervention in currency markets and ultimately resulted in the failure in the national currency.

Severe (and unusual) exogenous circumstances lay the groundwork for the hyperinflation to begin, these severe (and unusual) exogenous circumstances initiate the cycle, severe government ineptitude furthers the hyperinflation, severe public mistrust exacerbates it and government ultimately completes the cycle when they desperately crank the presses in an attempt to flood the market with an unwanted currency. What’s important to note here is that the printing press exacerbates and ends the cycle rather than actually initiate it. What lays the groundwork for the hyperinflation is severe exogenous forces or a highly unusual environment that government responds to ineffectively or inappropriately.

So Weimar Republic was not merely a case of “money printing” gone wild. In fact, it was the regime change, fragile state of mind, foreign denominated debts and productive collapse that resulted in the excessive “money printing”, collapse in the tax system and hyperinflation.

The Case of Zimbabwe

The other often cited case of hyperinflation is Zimbabwe. This is another extraordinary circumstance. To call these events “rare” and “severe” is a vast understatement. Zimbabwe is an utter economic catastrophe. GDP has declined 40% since 2000, unemployment has risen as high as 95% and hyperininflation has ravaged the country. The issue is far more complex than I have the time or space to deal with here, but in essence, Zimbabwe has proven a highly inefficient and corrupt nation for several decades. This was another case of fragile emotional state due to rampant government corruption, regime change, productive collapse, foreign denominated debts and an eventual collapse in the tax system. The Mugabe government is one of the most controversial in the world and has proven to be financially incompetent. A former government minister of Rhodesia, Denis Walker nicely summed up the environment in Zimbabwe in 1989:

“Zimbabwe’s government, already morally bankrupt, will decline towards economic collapse.”

Like Melchior before him, he was proven correct. But unlike Germany’s war torn economy the Zimbabwean economy is a sad story of centuries of racist regimes followed by incompetent leadership. The situation in Zimbabwe has largely arisen from the controversial land reallocations which sliced up their largest export and domestic form of productivity into the hands of the agriculturally incompetent. As internal production of food collapsed the government was forced to rely on the kindness of strangers. The Grecian “beggar thy neighbor” policy began as Zimbabwe started to rely on foreign imports of food. Unemployment increased, civil unrest increased and the government lost control of its internal finances and the currency ultimately collapsed as the citizenry voted “no confidence” in the government currency. Allow me to repeat what I said above:

“Severe (and unusual) exogenous circumstances lay the groundwork for the hyperinflation to begin, severe (and unusual) exogenous circumstances initiate the cycle, severe government ineptitude furthers the hyperinflation, severe public mistrust exacerbates it and government ultimately completes the cycle when they desperately crank the presses in an attempt to flood the market with an unwanted currency. What’s important to note here is that the printing press exacerbates and ends the cycle rather than actually initiate it. What lays the groundwork for the hyperinflation is severe exogenous forces or a highly unusual environment that government responds to ineffectively or inappropriately.”

The Cause & Effect

What is consistent among cases of hyperinflation is a number of rare exogenous circumstances:

  • A ceding of monetary sovereignty (usually in the form of foreign denominated debt, a currency peg, etc).
  • Extraordinarily unusual social circumstances (loss of war, regime change, etc.).
  • Very low levels of faith in government during regime change (high public mistrust).
  • Rampant corruption.
  • A collapse in the domestic economy.
  • A breakdown in the tax system.

The most notable environments involving hyperinflations are war, regime change, government corruption and a ceding of monetary sovereignty.

Wars are particularly disruptive for a society for obvious reasons. Being on the losing end of a war is not only disruptive, but catastrophic. It’s not surprising that hyperinflations tend to occur in war torn nations because the tax system tends to fail when the citizens begin to question whether or not their government will exist in the coming years. Civil wars have tended to result in hyperinflation as the tax system collapses and the currency issuer continues to spend to finance their losing cause. The American civil war and the Confederacy is exhibit A.

Regime changes are equally disruptive. While they can be highly beneficial in the long-run regime changes have tended to coincide with hyperinflations due to the fact that a new government is greeted with skepticism. The uncertainty in such an environment is extraordinary. This was most notable following WWI when several regime changes in Europe ultimately led to hyperinflations.

Rampant government corruption is a highly destructive environment. A currency is based on an agreement between the public and private sector. If one party of this agreement is seen as corrupt the other party is likely to want out of the agreement. Zimbabwe is the modern day poster child of corruption and mismanagement of a domestic economy.

A ceding of monetary sovereignty is another primary culprit in hyperinflations. This is generally due to government incompetence (such as the current Euro arrangement), productive collapse or corruption. Notable cases include Argentina, Zimbabwe and the Weimar Republic. A ceding of monetary sovereignty via a pegged currency or accumulation of foreign denominated debt is a sure sign that a government is increasingly unstable and at risk of currency collapse.

Is Hyperinflation Coming to the USA?

While some of these ingredients exist in the modern day United States (to a very minor degree) I would argue that we are a long long way from experiencing the type of environment and downfall that is consistent with past hyperinflations. The most important aspects of currency collapse simply do not exist in the United States today:

  • We do not rely on the kindness of strangers (no foreign denominated debt).
  • We are not experiencing any sort of extraordinarily unusual social circumstances or severe exogenous forces (losing war, regime change, government corruption, etc).
  • We are not lacking confidence in the sovereign nation. If there is one thing that Americans are known for it is their resilience and borderline arrogance with regards to the strength of their country.
  • We are not experiencing a collapse in the domestic economy (not yet at least).

In sum, if you’re betting on hyperinflation in the USA I believe you’re effectively betting on the existence of a highly unusual and severe circumstance that happens to coincide with dependence on foreign denominated debt (of which there is none), an economic collapse in the United States (not happening yet), a dramatic decline in Americans’ confidence and ultimately the destruction of the world’s reserve currency. I do not believe that the current environment is consistent with the disorderly economic environments that are generally consistent with hyperinflations. Don’t get me wrong – we have big problems in the USA, but I think they are more manageable than many presume. Could the US government become corrupt and incompetent to the point of resulting in a rejection of the sovereign’s currency? Sure, but I don’t think that’s a very realistic outcome given the current environment. Thus far, markets have tended to agree with this as USA CDS remain among the lowest in the world and bond yields remain near their all-time lows.


In sum, hyperinflation is not merely high inflation. Hyperinflation is a disorderly economic progression resulting from exogenous and unusual events that lead to complete psychological rejection of the sovereign currency. While government debts and deficit spending can exacerbate a hyperinflation they have not generally been the cause of hyperinflation, but rather the result of exogenous events. The excessive and incompetent monetary response is generally the result of severe exogenous forces at work such as war, regime change, corruption, or a ceding of monetary sovereignty.

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