Is hyperinflation coming to the U.S., Britain or Japan?
Hyperinflation in the eurozone would be a better bet.
So says James Montier, of investment management firm GMO, in a new white
paper titled "Hyperinflations, Hysteria and False Memories."
Montier picked up an interest in hyperinflation as a child as a result of
his father's smoking habit. At the time, exotic bank notes were packaged with
cigarettes. Montier senior passed a collection of these on to his son...
including a 1 million mark note from the Weimar Republic.
Montier examines hyperinflation episodes in:
- German Weimar Republic (1922-23)
- Hungary (1945-46)
- China (1937-49)
- Bolivia (1984-85)
- Brazil (1987-94)
- Federal Republic of Yugoslavia (1992-94)
- Georgia (the country, not the state -- 1992-94)
- Zimbabwe (2007-09)
And after going through this laundry list of hyperinflation episodes and
causes, Montier concludes:
To say that the printing of money by central banks to finance
government deficits creates hyperinflations is far too simplistic (bordering
on the simple-minded). Hyperinflation is not purely a monetary phenomenon. To
claim that is to miss the root causes that underlie these extraordinary
periods.
It takes something much worse than simply printing money. To create
the situations that give rise to hyperinflations, history teaches us that a
massive supply shock, often coupled with external debts denominated in a
foreign currency, is required, and that social unrest and distributive conflict
help to transmit the shock more broadly.
Money printing alone does not light the hyperinflation fuse. Something
major has to go haywire -- courtesy of an outlier such as war,
supply shock or crushing external debt load.
This is why Montier concludes the eurozone is actually a larger
hyperinflation risk than the U.S., Britain or Japan.
This is because, although these three countries are racking up huge debts
relative to their output, all three also borrow in their own currency and have relatively stable
politico-economic regimes.
The eurozone, on the other hand, is made up of multiple countries with
huge external debts denominated in currencies they do not control -- think
Greece, Spain and Italy -- coupled with great anger at "the
system," high potential for civil unrest (over 50% youth unemployment in
Greece and Spain), and serious breakdowns in basic stability mechanisms.
There is a lot of hype these days about hyperinflation in the U.S. But
extreme amounts of government borrowing are more likely to slow down the U.S.
economy than speed up the arrival of hyperinflation, as governments
"crowd out" more entrepreneurial uses of funds and near-zero
interest rates cause capital to languish in stagnant pools.
When giant corporations can borrow for 20 years at 2% banks only choose to
make super-safe loans. More dynamic businesses can hardly get capital at all.
This leaves the real economy (as opposed to the paper Wall Street version) in
a quagmire.
This makes it hard for hyperinflation to kick in, as monetary velocity --
the speed at which money changes hands from one transaction to another --
falls.
Some prophesy a bond crash will usher in U.S. hyperinflation, as the world
decides to sell all its bonds overnight. But this is unlikely because of what
happens when bond prices fall: Long-term interest rates go up.
That means, in the event of a bond "crash," rates would spike,
leading to an economic crash... which in turn would pummel risk assets and
scare everyone into buying bonds again!
For mature economies such as the U.S., stealth inflation is a far more
realistic outcome than hyperinflation. This is usually how the buying power
of a currency goes down -- not in great hysterical swoops, but in humdrum
dribs and drabs.
The best protection is hard assets. Make sure some of your wealth is
invested in stores of value such as gold and precious metals and real estate.
These are the best way to counteract the slow death of the dollar.
And be careful of going long European stocks or the euro itself. If
history is any guide, it could be the next economy to fall foul of a
hyperinflationary episode.
Carpe Divitiae,
Justice
The government is helpless to
stop the natural path of economic cycles
This is exactly what has been going on for the last 25 years. We've had a
series of financial bubbles fueled by government spending and easy money.
The government has used its power to print money in order to stave off
financial devastation.
Trouble comes, the government prints money, pumps it into the economy, and
things get better.
Consider the 2000-2001 technology crash. The markets tanked. Investors got
crushed. The economy tottered on the brink of total collapse. And what
happened?
In rushed the government with low interest rates... pumping money into the
economy and fueling an unprecedented -- and unsustainable -- real estate
boom.
Of course, the real estate bubble burst... resulting in the credit crisis
and sparking the global financial meltdown of 2008-2009.
The stock market plunged by 50%. Investors lost $3.2
trillion or more. Long-standing financial pillars like Lehman Brothers and
Bear Stearns vanished from the face of the Earth. For a while, it looked as
if the whole system would collapse. Freddie Mac and Fannie Mae had to be
bailed out. Hundreds of U.S. banks went under.
But again, the government rushed in and saved the day...
