Why haven’t we seen hyperinflation?Trevor Stark18 hours ago·7...

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    Why haven’t we seen hyperinflation?





    These days it seems like everybody and their grandma is talking about inflation. Everybody knows that the government prints money and that causes inflation, but it’s a little more complicated than that.

    CPI in the US has reached the highest level in decades and any consumer who pays attention to their expenses will tell you they’ve been feeling the pressure on their wallet. But most discussions of inflation seem to be missing many key important points:

    There are two types of inflation: monetary inflation and price inflation.

    Monetary inflation refers to an expansion of the money supply without a corresponding expansion in demand for said money.

    Price inflation refers to an increase in the price of goods, services, and assets. Generally when people discuss inflation they’re referring to price inflation, usually measured by CPI. (While CPI is a terrible measure of inflation and is manipulated by the Bureau of Labor Statistics, that’s a conversation for another day)

    What is the relationship between monetary and price inflation?

    The relationship between monetary and price inflation is not 1-to-1, but there is definitely a correlation. If there are more dollars purchasing the same amount of goods, companies can and will increase prices.

    This relationship can be seen most obviously in cases of hyperinflation:

    Krugman/Wells Slideplayer

    Beginning in the 1990’s, the Zimbabwe government started printing incredible amounts of money in order to make up for bad economic policies and to fund a war with the Democratic Republic of the Congo. Poor economic conditions as well as an insane increase in the money supply led to the second worst case of hyperinflation ever seen.

    By November of 2008, price inflation in Zimbabwe reached 79,800,000,000% monthly. This means that the price of goods and services effectively doubled every 24 hours.

    Weimar Germany Money Supply
    Weimar Germany CPI

    In order to pay war reparations and to compensate for a weakened post-war economy the Germany government started printing money. Similarly to Zimbabwe, this combo of a weak economy and printing money created massive hyperinflation, amounting to 29,500% monthly by the end of 1923.

    What about the US?

    It’s obvious that sometimes printing money causes massive inflation, but obviously not all the time.

    The following chart shows US money supply (monetary inflation)

    US M2 Money Supply (Federal Reserve Data)

    Since 1971, the amount of US dollars has increased 35x. That’s a 35 fold increase in just 50 years.

    If monetary and price inflation are correlated, why haven’t we seen the price of goods and services skyrocket 35x as well?

    Cumulative CPI (US Bureau of Labor)

    In the same time period the price of the basket of goods has increased 7x. While this is still an astronomic diminishing of purchasing power, it’s nowhere near the 35x increase in US dollar supply.

    The reasons for this are complicated and not completely clear-cut, but here are the most important:

    1. Innovation is deflationary

    As new technologies are created, it becomes cheaper to do things. This increase in efficiency means companies can either decrease prices or make a better product. This can be seen in most industries over time but my favorite examples are televisions and solar panels.

    Televisions have become ~6% cheaper every year since 1950. Along with the decrease in price, they’ve become much more technologically advanced, have more features, and weigh much less.

    Solar panels are another very interesting case:

    Price of Solar Panels (Bloomberg)

    Since 1977 the price of solar panels per watt have decreased by ~100x. This incredible decrease in cost comes from technological advancements.

    The fact that every product should become cheaper over time shows the incredible amount of money being created. In order for inflation to exist, the Federal Reserve must print enough money to offset the exponential deflationary effects of technology. With AI, automation/robotics, DNA sequencing, renewable energy and storage, and blockchain, there’s a whole combination of deflationary technology all coming to maturity together.

    2. The demand for US dollars is very high

    Because lots of people want US dollars, the supply can increase without a very substantial impact on the price of goods.

    Who wants US dollars?

    • The US dollar is used by Americans to purchase goods and services
    • Anyone who lives in a foreign country who wants to purchase a product from the US will need dollars
    • Most international transactions are denominated in dollars - most importantly oil. The members of OPEC as well as other oil exporting countries in the Middle East, Norway, and Russia denominate oil in dollars. This means that anyone who wants to purchase this oil must have US dollars, thus increasing demand
    • US treasuries are in very high demand. US treasuries are essentially a promise from the US government that they will return your initial investment plus interest. Given the incredible power of the US military and the relative strength of the US economy, US treasuries are basically risk free money. The market for US treasuries is around $30 trillion - $7.5 trillion of which is held by foreign central banks.

    3. Globalization is deflationary

    Similar to technological advancements, the ever increasing globalization that we see leads to price deflation as well. Short term, we’re seeing tremendous inflationary pressure because of issues with supply chains, but this issue will most likely be short lived.

    As we know, products from places like China and other less wealthy countries tend to be cheaper. This is because they can pay their workers less in comparison to how much Americans are willing to pay for the product. Along with an increase in shipping and manufacturing technology, different parts of the world are more abundant in certain resources. Oil for example is mostly found in a few places. The technological advances that allow extracting and transporting materials to be done cheaper, means prices should continue to decrease for everybody.

    4. Demographics

    Many macroeconomists are expecting massive deflation due to demographic shifts in the US population. The issue that is most often discussed is the Baby Boomers growing into retirement age. Historically, Baby Boomers have been the largest generation and starting in the past few years they have been reaching retirement age (Americans retire at 62 on average).

    The thought process here is people spend the most amount of money and work the most between the ages of 35 and 65. After retiring, most people do not add value to the economy, spend less money, and sell more assets than they purchase - all of which create deflationary pressure.

    This reason may be less salient than the rest given that technological advances will increase productivity and because in 2019 Millennials overtook Baby Boomers as the largest generation. This change came from an increase in young immigrants and Baby Boomers dying of old age.

    Will the US ever experience hyperinflation?

    While printing money is inflationary, the deflationary factors that the Fed is battling are massive and exponential. Since the Great Depression, the Federal Reserve has had an irrational fear of all deflation. Since 2008, the Fed has been fighting against deflation with every tool at their disposal, most importantly printing massive amounts of money.

    This fear of deflation stems from the economic downturn that was the Great Depression as well as the United States’ monumental debt. In an inflationary environment, debt becomes easier to pay off over time because the real value of the dollars owed decreases. With the US government owing almost $30 trillion in debt, a combo of deflation and debt this large would be deadly to the economy.

    Given the various deflationary pressures that are facing the US economy it’s highly likely that we will see deflation at some point in the future. When this occurs, the Fed will do everything in their power to fight against it - namely, printing lots and lots of money.

    This is where Bitcoin and gold come in. Given that the Federal Reserve uses every tool in their disposal to create inflation and avoid deflation, the best investments may be sound forms of money. When hyperinflation occurs, other classical assets (stocks, bonds, real estate) are decimated. While Bitcoin has a technological edge and many more applications than gold, gold has been valuable for thousands of years. Both forms of money are more sound than the US dollar given that they either have a limited supply.

    so much to say, so little time






 
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