Is hyperinflation really possible?

Time is compressing. Our collective attention span is contracting. Memory and imagination are being squeezed. What are the chances then that governments can act in our long term interest when their constituencies are driven by the here-and-now? This argument lies at the heart of those that foresee a hypernflationary outburst on the horizon.

Some clear thoughts:

1) The global economy is cooling – the economies of China, the US and Europe are all turning down.

2) Deflation has the upper hand

In this environment, it’s difficult to imagine inflation, let alone hyperinflation. Most major economies are in fact battling with debt deflation. Japan’s experience of the 90’s suggests that you might moderate the episode but that inflation is difficult to manufacture when you are caught in a liquidity trap.

But still, as Marc Faber has repeatedly repeated, the US has a money printer in the Fed. Ben Bernanke couldn’t be any clearer that, as an expert in matters Depression, a central plank of his strategy is to keep printing. Keep printing until you get inflation – this is written on the plaque above his door. That the Japanese and the UK have embraced the strategy without the same clarity of expression is simply a debate in semantics.

So the argument goes that governments will attempt to print their way out of their debt burdens. Create money to pay your debts, debase your currency, it’s not a default sure, just that your foreign creditors take a little currency haircut. The money printer with the quickest press wins the devaluation game. And the cost – ultimately – is inflation.

Okay that’s plausible, even if appearing remote in the current environment, but for hyperinflation we need something more. We need a supply shock. Money printing on its own won’t deliver this. Conceptually there could be a squeeze on real assets as money printing undermines paper money. But is that the same thing as a supply shock?

When hyperinflation emerged from the crucible in Germany, there was money printing and a currency crisis, but there was also the occupation of factories in the Rhur. It’s been argued that it was the resultant shortage in raw materials versus a ballooning money supply that fueled hyperinflation. This is what a supply shock looks like. It’s like the 70’s oil price shock with guns.

Conclusion

One thing is clear – risk will remain more expensive in this post-bailout economy. Whereas Japan’s decade long ZIRP was undertaken in an otherwise expanding credit universe (and helped to feed that machine), money printing has now gone global while credit has peaked. Combined with rising political risks, as politicians are stressed into action by their populations and balance sheets, investors must be compensated more for holding paper. The relative attractiveness of gold and other hard assets is easy to grasp.

But for hyperinflation to arise, we need our governments to lead us to the edge of the cliff. It’s possible. It’s happened before – the unintentional consequence of baby steps in the wrong direction. It’s presumably why Faber mutters about war and hyperinflation in the same breath when considering the ultimate outcome of today’s actions. Let’s pray that they are not – and hold that thought for longer than a nano-second.