Hyperinflation: 2011, 2012 or …?

Is hyperinflation coming? If so, when will it start and how bad will it be?

Update: See our latest posts – Hyperinflation and Hyperinflation 2013

In the United States, the Federal Reserve has been “printing” a lot of dollars. This would normally lead to inflation, but that hasn’t happened just yet. There are a number of reasons why we’re not seeing inflation, and these same reasons could also contribute to a future hyperinflation. It could start by the end of 2011, sometime in 2012, later or maybe never.

A lot of entities are holding dollars as a perceived safe asset. This includes individuals, foreign governments and companies. Today’s Wall Street Journal talks about Americans paying off debt and avoiding any more borrowing. Foreign governments are reportedly building up huge reserves of US cash and equivalents. See The Economist on China’s foreign reserves for an example.

In politics we also hear references to US companies holding lots of money overseas, keeping the money there to avoid taxes if and when they bring the money home. There is a push to reduce taxes on such money if repatriated, with the claim that the flood of money would increase tax revenue and create jobs. See a recent Washington Post article for that.

There is a nightmare scenario. When people anticipate rapid inflation, they spend cash quickly to acquire things before the money loses value. This spending increases demand and that increases prices, accelerating inflation in a vicious cycle – Hyperinflation.

Governments face pressure to increase salaries and prices paid for other goods and services and they print money to do so. The printing of more money further accelerates the inflation.

We might be headed there. With people, companies and governments holding piles of cash, the situation is ripe if something kick-starts it. Proposals to reduce taxes for companies to bring their money home are an example of a potential spark. It doesn’t have to be a policy decision – it could just happen, like lightning in a dry forest.

Once a spark ignites the fire, more and more of those holding cash will start spending it, whether on durable or consumer goods, or on assets like real estate or stocks.

From an investment perspective, there are two challenges. First, is it possible to time when hyperinflation might begin. I don’t think it’s possible to do so.

Second, if we do see hyperinflation coming, are there safe places to put your money? Again this is a tough one. Many of my friends are fond of gold. But that goes against the investing maxim – Buy low, sell high. Gold is very expensive right now.

Real estate seems a good potential investment because it appears low right now, but that’s where timing comes in. With so many potential foreclosures on the horizon, real estate values could drop much further in the next few years.

It’s far from clear that hyperinflation is coming. Japan has been through much of what we’re going through and has had deflation seem to be a bigger problem – the opposite of inflation. See The Economist on deflation in Japan.

From a government policy perspective, there are two views. The mainstream Keynesian view is that governments should juice the economy to create jobs. A more conservative view is that governments should get their houses in order and stop borrowing, to avoid blowing up the bubble further. From the title of this blog one might guess I favor the latter view – and that is correct.

The danger of hyperinflation is real, and the damage from it is far greater than anything we’re going through now. Read more at: Hyperinflation Watch.

2 Comments

  1. Real estate is too highly taxed to park assets in.
    If it doesn’t produce income, it loses money.
    When the bubble drove the prices too high to be supported by rents, prices collapsed.
    Managing rental real estate takes work.

  2. Warren, who says inflation hasn’t hit yet? The government?! And you actually believe them? The government’s inflation calculation often excludes things that have gone up – such as food and gasoline – as it did in the latest inflation report. Still, the number wasn’t that good.

    You are right about the hyperinflation fears. They are real. Where to put your money now before it happens is a tough call. Some, like myself, are already prepared. Many will not be. Real estate is probably not going to be a good bet because after the crash it will be worthless or the government will just confiscate it before the crash.

    I don’t have any answers for people who are late to this failure and I don’t want to give any advice anyway. One exception is to make sure you have some food stored. That may be the best investment you can ever make. I just hope that when it all happens, we will all still be able to live peacefully and ride out the storm together. My biggest fear is there will be a lot of violence and blood shed. If you do store some food, don’t be afraid to share it with others who will need it.

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