Hyperinflation - a possible threat? | Calamatta Cuschieri

Inflation figures have relentlessly been climbing up lately across the world: the U.S. inflation currently is above 5% while it is over 4% in the EU. In the U.S. Central bankers are responding by commencing their tightening measures in a quantum of USD15bn per month, while in Europe despite the high inflation the ECB has maintained its current pace. The term better known as ‘tapering’ is one form of a monetary tool while raising the policy interest rate is another, and it is more explicitly being discussed in the U.S. In smaller or more fragile economies, where the economic cycle is ahead of that of the U.S., monetary politicians have already had to resort to raising interest rates. Such actions will work against inflation but will also slow the economy down as market participants will be less prone to invest their money in businesses and more likely to choose to deposit them in a bank. This is the clear distinction between consumer-driven inflation versus supply-driven inflation.

Thus there are different forms of inflation. In such an environment, many market participants, even well-known figures talk about hyperinflation. Tucker Carlson, an American television host, and political commentator recently said, “we wound up with frightening levels of inflation,”. Influential entrepreneur, CEO of Twitter and Square, Jack Dorsey said lately: “Hyperinflation is going to change everything. It’s happening,”.

Hyperinflation is a rapid, excessive, and out-of-control increase in the general level of prices in an economy, typically measuring more than 50% per month. It generally occurs in times of war or serious economic turmoil and typically also involves excessive central bank money printing. Hyperinflation is rare but has happened a few times in history. The most serious cases happened in Weimar Germany in the 1920s, in Hungary after the Second World War, or more recently in Venezuela, where it is still ongoing. A loaf of bread that cost 250 marks in Germany in January 1923, cost 200,000 million marks in November 1923.

In a hyperinflationary economy, the population loses complete trust in the country’s currency, in some cases, the money is worth less than the paper it was printed onto. People resort to using another country’s currency or engaging in barter transactions.

As we can appreciate, the two scenarios described are very different from each other. The first one is ‘only’ rather a drag on the economy while the second case is a complete disruption of economic processes having a very serious impact on businesses and people’s lives. In the 1980s the United States experienced double-digit inflation, in 1980 the U.S. inflation rate was as high as 15% and was it coupled with serious economic issues: U.S. GDP fell by as much as 4.3% in 1982 and the unemployment rate almost doubled from 5.1% to 9%. That level of inflation is not considered to have been ‘hyperinflationary’.

Apart from the current monetary policy interventions, there are a few overarching macroeconomic processes that also support the deflationary argument. Wealth is more and more concentrated in the world. This means that money is spent at a slower pace because the well-off tend to spend a smaller portion of their income than those who live from paycheck to paycheck. Less money spent in the overall economy results in smaller aggregate demand and eventually has a deflationary impact. The ever more widespread use of technology-based solutions by businesses also presents a widespread deflationary push on prices over the long term.

We can conclude that even though the inflationary pressure is real and may well stay with us for the next period, we are nowhere near such a cataclysmic situation that would bring about a complete disruption of the financial system. The fear of hyperinflation should be considered exaggerated and unrealistic and is not warranted by current short, medium, or long-term economic processes.

Disclaimer: This article was issued by Tamas Jozsa, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view, and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.