If Enough People Read This, Hyperinflation Is Coming Next Week

If Enough People Read This, Hyperinflation Is Coming Next Week

Pernicious fictions

You can feel the ground shifting. The pandemic forced the issue.

Around this time last year, the veil was lifted on the charade that says advanced economies with sufficient monetary sovereignty are budget constrained. It’s now clear to many everyday people in developed markets that their governments do not, in fact, have to “fund” fiscal spending up front.

Of course, this has always been a fiction, and a periodically pernicious one at that. The notion that funding, for example, college tuition, infrastructure and healthcare is “too expensive” is just a useful diversion when politicians need to “explain” why they can’t pursue an agenda they don’t care for or, perhaps more to the point, agendas they believe might upset the existing order or otherwise irritate special interests.

The fact is, there isn’t anything priced in dollars that the US can’t “afford.” And because everything is priced in dollars domestically, and most everything can be priced in dollars globally, the US can “afford” to buy anything it wants. And no, the government doesn’t need to tax you or borrow to do it.

Those are the facts. Everything else is fiction.

This is all familiar to regular readers, but I imagine the lesson will be lost once the urgency of the pandemic fades. So, I’ll reiterate it, with a twist. Everything below is meant to appeal to a wider audience, so those of you steeped in the debate will need to forgive any repetitiveness.

Infinity + $100 billion

I often lament the extent to which a self-evidently false narrative has, over the years, become synonymous with common sense.

The government, the story goes, needs to balance its books. Running large deficits is irresponsible. Too much debt is a one-way ticket to bankruptcy.

That all sounds like common sense, but when you’re talking about a currency-issuing monetary sovereign which counts itself part of the developed world, it’s the furthest thing from intuitive. Rather, it’s manifestly counterintuitive.

Forget about inflation for a minute. We’ll get to that shortly, but before we do, we need to run through the basics, which the vast majority of the public doesn’t understand. Indeed, it’s apparent that, due to decades upon decades of indoctrination, many market participants, politicians and nominally intelligent individuals don’t understand the basics either.

You can’t properly “borrow” a sum that’s denominated in a currency that you, and you alone, have the authority to issue. The US has access to a limitless supply of US dollars by virtue of having a monopoly on their legal issuance. Ask yourself this: What does it even mean for the US to “borrow,” say, $100 billion? Or for Britain to “borrow” £50 billion?

The “supply” of US dollars to the US government is infinite. Nobody on Earth can print a real dollar except the US government. And the US government isn’t constrained in how many of those dollars it can print. No sky-dwelling, bearded Zeus handed down any stone tablets chiseled with divine dictates setting upper limits on the issuance of currency. And because money itself is just as imaginary as our bearded Zeus, there are no natural laws governing or otherwise constraining its issuance either.

Does it make sense to say that the US can “borrow” $100 billion? No. On multiple levels, no.

This is circular, so there’s no “logical” place to start. Given that, I’ll just pick a point on the self-referential merry-go-round and go from there.

First, what is the outcome of that transaction? How many dollars does the US have if it “borrows” $100 billion? What do you get when you add $100 billion to infinity? What’s on the other side of the equals sign here:

Now come the corollaries.

The notion that the US can “owe” dollars is nonsensical. The US can have an obligation to distribute dollars, but it can’t “owe” them, where “owe” entails indebtedness. The US is not “in debt,” or at least not if the obligation is payable in dollars, which all obligations generally are.

If you have an infinite supply of something, the only way you can “owe” it, is if you choose not to make a distribution from your limitless supply. For example, there are only two ways I can “owe” a debt denominated in my own saliva: I have a case of dry mouth or I refuse to spit in your hand, preferring to wait until some future date.

Treasurys, then, aren’t “debt.” They’re interest-bearing dollars.

At this point, even the casual reader will understand why the debate about the “interest cost” of America’s “debt” burden is no debate at all. It’s just people speaking gibberish at one another. Interest payments are denominated in dollars. The US has infinite dollars. A “cost” is not a “cost” if payment can be rendered in something that you can conjure at will.

In short, the US has no “debt” and there is no interest “owed.” Period. To say otherwise is to traffic in self-referential nonsense.

Americans aren’t smart enough for hyperinflation

Now, let’s turn to inflation, the hot-button issue of the day according to the financial media.

You’ve probably heard some version of the argument that historically, societies which issue currency at a rate that exceeds economic output doomed themselves to hyperinflation. There are two things worth noting about that.

  1. We don’t know whether it’s true. We simply can’t make sweeping, definitive claims about what has and hasn’t “always” been the case for every society throughout human history. We don’t even know, for example, whether monogamy is a naturally occurring predilection or a totally contrived state of affairs that in fact runs counter to our ingrained inclinations. Society tends to prefer the former characterization, but the high incidence of infidelity seems to argue in favor of the latter.
  2. The complexity of the global economy and the opacity of the financial system make it extraordinarily difficult for everyday people to come to any kind of economic conclusions, let alone form a consensus that could trigger runaway inflation. Sure, supply/demand imbalances, bad policy and perverse incentives can drive up prices for things like lumber, healthcare and college tuition, but none of that has anything whatever to do with Americans reading history, doing math and collectively determining that a green piece of paper which never had any inherent value in the first place, is somehow more worthless now than it always was.

Speaking to that second point, the figure (below) makes sense to analysts, economists and readers like yourself, but let’s do a thought experiment.

If you could somehow assemble 1,000 people in an auditorium, each typifying Americans’ general interest in, and knowledge of, the US economy, how many of those archetypal, “average” citizens would be able to decipher and otherwise explain what the chart shows?

Even if you kept all of the text on the visual and left the legend intact, it is inconceivable (to me anyway) that more than 100 people out of the 1,000 in the building would come away from that gathering truly concerned about inflation, where “truly” means they would alter their consumption habits going forward and seek out additional information.

Remember, our sample in this thought experiment is 1,000 typical Americans. So, the same people who decided Facebook is a good place to spend lots of time. The same people who, anecdotally, have a difficult time differentiating between “there,” “their” and “they’re.” The same people who famously struggle to identify other countries (any other countries, with the possible exception of Canada) on an unlabeled map.

I doubt seriously that enough of those “average” people are interested in, let alone capable of, conducting the kind of analysis necessary to grasp why the current policy conjuncture “should” be inflationary. That kind of analysis requires far more in the way of study than it did just three decades ago. It’s hard enough to teach two dozen undergraduate students the basics of finance without half of them failing the course. If you attempted to incorporate quantitative easing, negative rates and all the distortions brought about by the post-financial crisis monetary policy regime, nearly every student would almost surely fail. And that’s assuming they didn’t drop the course halfway through after being forced to ponder the idea that someone would pay someone else for the “privilege” of loaning that person money (i.e., negative rates).

Extrapolating from that to a citizenry that is almost totally disinterested in scholarship of any kind and can scarcely be bothered to read a relatively short newspaper article, let alone a book, the notion that runaway inflation is a serious risk in the US seems wildly far-fetched.

The tragic irony of MMT

The irony, of course, is that all of the above is essentially an argument in favor of hyperinflation. That is, if enough average people took the time to read something like this straightforward article, they’d quickly realize that none of this — the dollar, Treasury bonds, British pounds, gilts, etc. — has any meaning whatsoever. It’s pure fantasy. 

But don’t worry. This article is, as of this sentence, 1,497 words long. That means the average person won’t read it. And it would take a mass, across-the-board awakening involving hundreds of millions of people, to shake the psychological scaffolding that gives meaning to the dollar and the international financial system on which it’s based.

This is the tragic, self-defeating irony of Modern Monetary Theory. The same public awakening required to compel lawmakers to abandon myths about the deficit and debt on the way to instituting policies that can change lives, reduce inequality, eradicate food insecurity, establish universal healthcare and bring the environment back from the brink, would likely also lead to a rapid, wholesale loss of faith in the same dollars which, once freed from dogmatic shackles, could have saved the world.


19 thoughts on “If Enough People Read This, Hyperinflation Is Coming Next Week

  1. “There is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man’s fears and the summit of his knowledge. This is the dimension of imagination. It is an area which we call the Twilight Zone.”

  2. The “US hyperinflation” call has been so wrong for so long that it shouldn’t have credibility, and looking at yields and other measures I’d say the markets certainly don’t give it credence.

    As for regular old inflation – meaning something in the low-single-digits – it, and the associated higher rates and yields, higher costs of capital and hurdle rates, and improved return on savings and reduced TINA, are on balance more beneficial than harmful in my opinion. For companies to have near-zero cost of capital is not necessarily a good thing, even if the partytime is fun.

  3. Put 1000 Americans in a grocery store and see if they can identify if their (there? they’re?) money goes as far as it did last year, or even last month.

    The average American doesn’t have to know how or why to identify that his or her money is worth less and that if the trend continues long enough it might be worthless.

          1. Ah, thanks for the zoom in. It was difficult to tell from the original where the x ended.

            So what’s the takeaway from this?

            I see that prices have moved steadily higher albeit at a r”generally decreasing rate (assuming the current spike doesn’t hold).

            I see a brief period of 40% inflation which would indicate to me that hyperinflation of the dollar isn’t impossible.

            I would bet that consumers would notice the reduction of their buying power between 2019-2021…

          2. Well of course prices have moved higher over time. If you walked into a gas station, took a Coke up to the counter, and the clerk said “That’ll be one shiny nickel, fine sir,” you’d laugh. If the clerk persisted, you’d probably ask to speak to a manager and gently suggest that the person working the counter might be suffering from some manner of psychological distress.

            You need some inflation, otherwise people will be disincentivized to buy anything other than necessities. Why would I buy it today if, based on experience, it’s going to be cheaper next year and even cheaper the year after that? And that’s to say nothing of the benefits to debtors.

            The problem (or at least one of the problems) is that employers being the profit-maximizing capitalists that they are in a world where labor has seen its bargaining power steadily eroded, don’t pay enough for the middle-class to enjoy a steadily increasing standard of living. If giant companies aren’t compelled to compensate workers for the long-term, benign increase in prices plus some on top as a show of good faith and profit-sharing, real wages for working people stagnate or, worse, they fall.

            Don’t get me wrong. Some of this is just me playing Devil’s advocate. My point is just that if you’re going to take a position on this, it really should at least lean in the direction of acknowledging that a decent situation is one defined by a very gradual increase in prices over time accompanied by higher wages and an abundance of good-paying jobs.

            In my opinion, you don’t want to suggest (and I’m not saying you are) that it would be better to have intractable deflation because then at least the relatively meager dollars you manage to extract from the iron grip of the profit-maximizing C-suite aren’t losing their purchasing power. That’s a recipe for a dreary, sluggish economy.

          3. FWIW, H, do we know that people really reduce their consumption of non-essentials in a deflationary environment? I’m honestly not convinced (anymore. I use to parrot that line too as it seems ‘utility maximising’ on the face of it).

            For example, in laptops/PCs, a place where “deflation” occurs very perceptibly and waiting is always the technically superior option, I find myself spending roughly the same budget for my personal laptop – around $2,500 every 4 year for the at-the-time top consumer option, below pro-gaming rigs’ choices that would run to $10,000 (more that I can afford/am willing to spend).

            But I don’t wait. Why? B/c i want to enjoy the PC I’m planning to buy and waiting a year for a better one doesn’t work. I’d have to spend one more year with a now 5 yrs old PC, which is too much trouble.

            Ditto vacations. I won’t delay a ski trip on the pretext it’d be cheaper next year. So do people really delay buying a washing machine if it’ll be cheaper next year?

            It seems to me that the only thing we would really like to buy and that keeps going up in price is “a protected middle to upper middle class lifestyle”.

          4. You and I are different when it comes to technology then. I absolutely (everywhere and always) take maximum advantage of deflation in things like TVs. I wait the maximum length of time (within reason, anyway) to buy a new TV, because I know that the 65″ (or whatever) that I bought last time will be 40% cheaper a few years later as long as I don’t accidentally squander that deflationary windfall by opting for some “upgrade” (e.g., new features or a “brighter” screen, etc.)

            As for PCs, unfortunately, Macs just seem to get more expensive over time. They don’t exhibit much deflation. 🙂

  4. I doubt that H takes this article seriously at all and probably enjoyed his hyperbole, at least the part about people losing faith in the dollar. Someday we might be contacted by a galactic civilization and will be constrained by having to use the galactic currency, the zoot (to put a name to it). Right now, the dollar buys anything one wants but someday zoots might be needed (to buy unlimited lifespans or advanced technology). To natives of the Americas at certain points in time, a steel knife was invaluable and one found the currency (furs, gold) needed to buy it. In March 2020, a covid vaccine shot would have been invaluable to many. Tilray.

  5. A household budget is beyond most peoples capabilities and thinking beyond that would mean intellectually thinking two ways at the same time. Currency is akin to Taoism, or riddles,or the stuff Jesus said you wouldn’t get. Obvious and imaginary at once. Perspectivism does not come naturally to most.
    Starting Economics in 1975 was a world based on gold; hard,real,a god that would always shine. I joked to a professor that it was the only thing snuck out of Eden. He did not laugh. I was a fool to him.
    Crypto has taken some of the shine and political windfall from the hard currency set. Their bark does not threaten the bite it once did. If Gold was on a hot streak it would be proof enough for hyper inflation around the corner. I have heard that one a few times since the gold window closed. Like Nietzsches well worn coin, it’s value loses currency.
    Three recessions from now Gold price may not even warrant a quote on most screens. Hydrogen hopefully.

  6. I have often thought of holding a USD as a promise made to me that I can participate in the future of the USA. If I hold euros instead, then no such promise regarding my ability to transact my life in the USA (and the other parts of the world that use/accept USD) has been made to me. There are a lot of caveats to this that I will skip over.

    Just as one must give careful consideration to what currency they want to store their retained value in (bitcoin is not for me), one must also give careful consideration to whom they marry- unless, of course, they do not truly care whether or not the promise of fidelity is kept.

    Similar to when I decide whether to store my retained value in Aapl, JPM or SPY, I must also decide in which currency I want to store my retained value. As the global population has increased dramatically over the last 100 years and global trade has had exponential growth, it is not surprising that the world can fairly easily absorb more USD.

    When a company in which I am invested issues more stock in a secondary offering, it is not necessarily dilutive- it really comes down to how those proceeds will be used. If the outcome of issuing more USD provides the opportunity for improved education, health and food so that humans have more free time to use their brains to solve other problems (climate, clean energy, relocating to Mars, etc.) this seems like a pretty good idea. Not too worried about creating USD to work on cleaning up our environment- it is the “pork”/highways to “nowhere” that is the problem.

    Global population is expected to “peak” somewhere around 11B before it declines ( the population growth rate has a reverse correlation with rising living standards throughout the world). A LOT of people throughout the world want to “park” their retained worth in USD- therefore, as long as global population is increasing and many of those peeps want USD and we don’t “waste” too much, I can not think that we won’t be ok printing USD. What we need is better leadership- people who are willing to lead our country that are thinking about what the USA and the world should look like in the next 10, 25, 50 and 100 years.

    As soon as USA leadership figures out what the 100 year plan looks like, and that plan looks “good”, we will be able to issue a 100 year UST bond…. haha….that is meant to be funny!

  7. Out of curiosity…. when Germany’s Marks became (essentially) worthless after WW1 gold still held it’s value based in US dollars, British pounds, French franks, Norwegian krona etc. Assuming that there was a global agreement on it’s value (probably based on the strength of the US dollar.) This was also probably the case with every other currency which at some point in time became basically worthless. Gold was still worth something across the border in the next jurisdiction (and every other jurisdiction.) Has there ever been a case where gold lost it’s value and was essentially worthless? And if the answer is ‘no’ why not?

    1. Not yet, and on that Point Dalio is correct. Gold has been the secret chain of peace treaties. Losers become beggars and gold has been the enforcer. Even smaller allies pay the price. Any reserve currency steals value.

  8. As H points out, it is mass psychology (or maybe confidence is the better word) that is the Achilles heel of MMT. If the world over time decided greenish paper with the dead leaders of a young country are not the preferred currency they like to trade in, that would probably change the calculus behind real and nominal inflation. For everyone, who ultimately would fail an updated economic course, technology and the lack of bargaining power have conspired to make their own dollars worth less, even in a world with low inflation.

  9. The discussion above concerning technology (deflationary) prices has two sides, one of which was omitted in all the replies. The omission is the effect deflation has on producers. For technical reasons related to chip yield and other things, new chips and the products that use them have peak prices at introduction. As chip yields rise, supply also increases forcing higher throughput at the fabs. At some point higher throughput, based on adoption, will overwhelm plant and logistics capacity, requiring increased investment and creating increased fixed costs, costs which are unrelated to volume and revenue changes. What happens, especially in the tech world is that economics and engineering aren’t always compatible. Consider a complex, state of the art AI chip set that is introduced with relatively low yield and a high production cost, say $1500. The initial price to buyers is correspondingly high as demand exceeds supply. Then after 12-18 months yield is way up, demand stays up but cost starts coming down rapidly. Prices will start to fall as well and my be down around $150-200. For the supplier, output growth of 8x will leave them with — the same sales they had before — eight times the output at one-eighth the price, resulting in flat revenues. But if throughput is up 8x, storage needs (fixed cost), logistics workforce (fixed cost) and related cost items will be up while the revenue to pay those costs will not. And that’s why Intel, Micron, and other fabricators have so much trouble keeping the street happy. Innovation is a fearsome tyrant and deflation is its ally.

  10. Great article and responses. An old worn out gold or silver coin is worth more than face value melted. A $20 liberty double eagle from Nietzsches day at 50% wear has a melt value of $850. But I am probably missing the point. I asked about all this fascinating paper money and value stuff as a kid and the answer was not adequate. I think I understand why it was not adequate, now.

    Laid off from AMD Austin in the 90’s due to market conditions ended up at a subcontracting company providing services to Intel in Albuquerque 1999 and was laid off again for the same reason. The “markets” were cramping my style. By 2000 I felt it was necessary to learn to follow the macro and how to drive a big rig otr, so i did. Had a chance to get on with National Semi Conductor a mere five years later and as much I love a cool well lit clean room the money was not competitive anymore.

    I do all right now, learned some science at the Junior College and leveraged it into a environmental career. Anyway that is how I found H., just trying to understand the macro (insert Joe Biden Man!). But sometimes I read more for the writing skill.

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