🔔 Hyperinflation Hyperbole

 Hyperinflation is going to change everything. It’s happening.— jack⚡️ (@jack) October 23, 2021 

In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies, such as the US dollar.

Hyperinflation —usually 1,000 percent or more a year— occurs only under very special circumstances: in a disorderly breakup of a currency zone; after wars or revolutions, when monetary or fiscal authorities lack control; and when wild populism prevails.

How are the United States' historic budget deficits, money-printing and depressed economy any different from the countries that have experienced hyper-inflation? The three-part answer is:

(1) we don't have any problems selling our debt;

(2) we aren't actually printing money;and

(3) the United States is a highly productive economy that is nothing like bombed-out Budapest.

Let me unpack these one by one.

Right now getting the markets to buy our debt isn't the problem. Getting enough debt for the markets to buy is the problem. Investors are so crazy to load up on Treasuries that they're actually paying us to borrow, taking inflation into account.

But while we're currently getting free money from investors, Hungary circa 1945 was getting no money. It was an investment pariah. If Hungary wanted to rebuild its economy, its only recourse was the printing press.

 Large #EQO holders will get the most from the EQO-D airdrop campaign. If you hold more than 20,000 #EQO at 23:59 UTC today, you will receive a multiplier of up to two times the EQO-D buyback price.https://t.co/gDKGn9ZR82 pic.twitter.com/Zmt0pVq1A7— EQONEX (@eqonex) October 25, 2021 

 The Hyperinflation Hype

This excellent article was written back in 2012 by @ObsoleteDogma 

It's as relevant today as it was back then

Because everyone's attention spans have shortened since, here are the key points (thread)

1/8 https://t.co/TEaM7n65ei— Macrodesiac (@macrodesiac_) March 3, 2021 

When the Fed buys bonds from a bank they simply swap reserves for t-bonds.  The bank has the same net worth (roughly, depending on any capital gains and as mentioned previously QE1, 2 and 3 have had diminishing returns here) and the reserves sit in the interbank market (and no, they don’t get “lent out”, that’s not how banking works).

Now, I don’t think it should be controversial to say that spending is a function of income relative to desired saving. Inflation is an extension of spending.

And if producers have pricing power due to high aggregate demand or aggregate supply shortages then prices will generally rise (I’m oversimplifying, but for the purposes of this discussion that’s sufficient).

So you generally need the spending if you’re ever going to have the inflation. It’s that old demand thing.  If you’ve ever run a business you know that revenues and pricing power don’t exist without customers walking in the door.

The problem with QE is that it doesn’t have a transmission mechanism to substantially increase aggregate demand.

And if producers have pricing power due to high aggregate demand or aggregate supply shortages then prices will generally rise

This chart is a pretty simple debunking of the USD hyperinflation narrative.

In short, the govt printed tons of money during covid and that caused some uncomfortable inflation in 2020/1.

But the fiscal headwind in 2022/3 is huge. 👇

The approach is built on the work of Knut Wicksell, a late 19th century Swedish economist whose key insight was that at any given time, there  are two interest rates: the “natural” or optimum rate (which we can only infer) and the actual or market rate (which we can see).

When the market rate is set too low, capital misallocation emerges, leading to an inflationary boom and inevitable subsequent bust. When the market rate is set materially above the natural rate, the economy quickly tanks. Good policy means keeping rates within the Wicksellian “optimum range”. 

At any point, I have no idea what the natural should be, but I can roughly estimate when market rates are either clearly too low, or far too high. It will, by necessity, be an inexact judgement, but as John Maynard Keynes sagely noted, it is better to be approximately right than precisely wrong.