History You Should Know: Hyperinflation





I landed at Avery Goodman's excellent article (one of many) at the end of a short google, occasioned by my wondering how stocks would do in a hyper-inflation.  Turns out that stocks would also be f*cked, though nowhere near as badly.  I present this description of the causes and effects of hyper-inflation, lovingly excerpted and highlighted for my (mostly hypothetical) audience of Gentle Readers, due to its current relevance, especially the breakdown of parrallels to the Weimar republic. 

....All factories, houses and buildings were still standing, before, during and after 1920s German hyperinflation, just as they will be in 2011 America. Germany in the roaring 20’s was still a potentially rich nation, just as America will be in 2011. But, the stored work product of a generation, represented by the symbols of stored wealth, in the form of cash, savings, stocks, bonds and other paper instruments, became essentially worthless, almost overnight. The same may happen here.


For America, like 1920s Germany, the hyperinflationary trigger will not come from within the nation. It will come from outside. Eventually, China, Japan, and/or some other nation, will see the endlessly increasing American deficit spending as a threat to the viability of the U.S. dollar. In response, they will reduce their purchases of treasury bills. This will bring America to her knees. Indeed, there is already talk, in China, about the danger of keeping Chinese foreign reserves predominantly in the form of U.S. dollar denominated treasury bills and bonds. The Chinese are talking about diversifying away from the U.S. dollar. This will happen, eventually, no matter what we do. It is not a matter of “if”, but, rather, of when.


The joint mismanagement of the American economy by sequential administrations, both Democratic and Republican, have insured that we are now totally dependent upon the whims of the Asian governments. When it finally happens, dollar denominated paper will begin to lose value very quickly. The U.S.A., with a hollowed out economy, is no longer producing much of anything but agricultural products, some sophisticated technological products, a lot of internal services and housing. The need for imports, using a deflated dollar, will swing the country into a hyperinflationary downward spiral.


It will not happen overnight, but it will happen. The situation is so far advanced, at this point, that no matter what we do, there is probably no way around it. The new plan, from this Administration, to buy toxic mortgage instruments from the irresponsible financial firms who caused the credit crisis is not going to stop it, and may very well be the straw that breaks the “camel’s back.”


At minimum, the U.S. dollar will depreciate by the amount by which the Federal balance sheet is corrupted by the toxic mortgage paper. Most frightening is the prospect of giving Hank Paulson, the prior Chairman of Goldman Sachs, one of the key creators of the toxic mortgage instruments that have caused the credit crisis, unlimited discretion in doling out $700 billion in bailouts, without any possibility of judicial review. Doing that assures that the money is used in the most inefficient and nepotistic manner. It will bring us deeper into hyperinflation.


We can rationally expect that the US dollar will lose about 75% of its value, within 2-3 years. Cash in the form of government and/or corporate bonds, money in CDs and other bank accounts, will be hit the hardest. General index fund type of investments, such as DIA, SPY, QQQ, and the like will also be very bad investments....

Be Seeing you.

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2 comments:

  1. Re: “... the U.S. dollar will depreciate ...

    If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2009 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

    The April 15th metal value of these nickels is “$0.0634674” or 126.93% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” available at Coinflation.com.

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  2. "The need for imports, using a deflated dollar, will swing the country into a hyperinflationary downward spiral."

    Not sure if I can agree with this. The first manifestation of hyperinflation would be a declining dollar. It would buy less in dollar terms.

    Hyperflation would drive up costs, with imports costing a lot more. However due to a cheaper dollar, imports' higher prices would cause some demand to be shifted to domestically made, dollar-denominated products.

    There would be the shock overnight however of Wal-mart jacking up there prices across the board (as so many of their products are imports.) The Chinese would naturally BUY dollar-denominated paper (debt, bonds, property, whatever) to keep the dollar up in value (and their price of imports steady.) Heck the Chinese could even induce inflation to decrease their currency (though selling Chinese yuan-denominated assets to buy dollars would be easier.)

    As long as those who export to us want to keep their sales up, they can't let the dollar go too low. Interest rates would climb, which would be another reason to own dollars, unless their fall is so precipitous and rapid as to catch central banks unprepared and get them to overreact like the 1920s, according to the article by Ian Fletcher "Protectionism didn't cause the Great Depression."

    None of this contradicts your basic premise. Already we could say excess dollars are slowly pushing their way into circulation--monetary inflation. Even though we don't see excess demand/wages/spending pushing up prices--called price inflation--this could come as a secondary effect of the first, monetary wave.

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