The Coming Hyperinflation?

The one word you won't find on Running of the Bulls is "hyperinflation," at least as it pertains to the United States.

I have seen "hyperinflation" used to describe the inflation of the 1970s, but I do not consider 7%-9% inflation to be "hyperinflation."  Instead, hyperinflation is what has happened in Zimbabwe or Latin America during the 1980s or the Weimer Republic.

And I do not believe hyperinflation is coming to America. 

But that doesn't mean I could be wrong.  And an article in The Daily Telegraph last week sketches historical analogies to the current situation in the United States.

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

In other words, the Fed's balance sheet is not just the kindling, but also the gas-soaked rags on top of the kindling in the drought-ridden forest with seeping methane coming up from the ground.  It will take little for the forest to alight if the population suddenly changes it's attitude towards the currency.

The rest of the article is well worth the read.

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