The Truth About Hyperinflation in the US: Is it Time to Get Out the Wheelbarrow?

[Ed. Note:Chris Mayer has stirred up a lively discussion with his recent posts on Modern Monetary Theory. Below, you’ll find Chris addresses some of the questions and comments we received from readers.]

Daily Reckoning reader question: Should investors be worried about inflation…or the possibility of hyperinflation?

I think investors should be worried about inflation because that’s really the reason why we all invest, right? If there was no inflation, we could just take our money and put it under our mattress and we wouldn’t have to worry about it. We wouldn’t have to worry about picking stocks or trying to figure out what’s going to preserve our purchasing power.

But the fact is, over time, the dollar’s purchasing power diminishes in terms of what it can buy in the real world of things. I can guarantee that what you pay to buy a movie ticket today, what you pay to buy a haircut today, is going to cost you more ten years from now than it does today. That’s almost assured.

So that’s what creates the investing conundrum is how, given all that, can you preserve your purchasing power in some way? And that’s really a challenge of investing.

Now, how can you have hyperinflation? It’s a good question. And when you look at past hyperinflations, there are a lot of factors involved, but one thing that’s definitely has to happen is you would have to have some massive impairment, or massive destruction of the economy’s ability to produce goods and services. So when you look at past hyperinflations, like in Germany, you know, they lost a war, so the economy took a huge hit.
In Zimbabwe, again you had Marxist thugs take over, a huge hit to what the economy could produce.

The analogy I would use is: think of an economy as a supermarket; it has so many goods available for sale. And there’s so much money floating around pursuing the different goods for sale. So what if you just had – took half of the supermarket and just nuked it, the rest of it’s gone. What would happen? Well, you would have massive inflation, right? Because you have the same amount of money that’s suddenly pursuing a much smaller amount of goods and that can create a hyperinflation.

It’s rare that you have a hyperinflation just because people are turning the printing presses on. You have to have that also on the other side, suddenly what’s available for sale in that currency really goes away or shrinks, and then you can have super hyperinflation. So I think the risk of a hyperinflation in the U.S. is virtually nothing, it’s virtually nil, unless half the country, there’s a meteor that hits half the country or something like that.

DR Reader Question: Can the government spend too much and cause inflation? Is there a limit to the amount of money they can create out of thin air?

I think the government running deficits doesn’t automatically mean you have inflation because it depends on what the economy produces. I mean, you have much more goods and services that you can buy, and you have an increase in money, you might not see any appreciable difference in the value of your currency.

We should also probably say what inflation is, because people don’t agree on a definition of inflation. Some people will say inflation is an increase in the money supply, in which case any deficit spending increases the money supply, and all other things being equal, that’s inflation, right?

Some people will say inflation is an increase in the prices of things, and that’s hard to measure. Or you can say inflation versus a basket of foreign currencies. I think the U.S. dollar will probably prove to be a pretty good investment, versus, say, the Argentine peso, or a lot of the currencies in the world.

So, I guess there’s no easy answer to your question. I would just day theoretically, sure there is a limit. The government can spend too much and can create inflation, but it doesn’t seem that we’re necessarily near that. Meaning that they don’t create hyperinflation or really high rates of inflation.

I think we always have some small level of inflation in our economy. Our economy is fundamentally built to deal with an inflationary environment, which makes dealing with deflation much more difficult.