Guest Post: What Causes Hyperinflations And Why We Have Not Seen One Yet

Tyler Durden's picture

Submitted by Martin Sibileau of A View From The Trenches blog,

What causes hyperinflations? The answer is: Quasi-fiscal deficits! Why have we not seen hyperinflation yet? Because we have not had quasi-fiscal deficits!

As anticipated in my previous letter, today I want to discuss the topic of high or hyperinflation: What triggers it? Is there a common feature in hyperinflations that would allow us to see one when it’s coming? If so, can we make an educated guess as to when to expect it? The analysis will be inductive (breaking with the Austrian method) and in the process, I will seek to help Peter Schiff find an easy answer to give the media whenever he’s questioned about hyperinflation. If my thesis is correct, three additional conclusions should hold: a) High inflation and high nominal interest rates are not incompatible but go together: There cannot be hyperinflation without high nominal interest rates, b) The folks at the Gold Anti-Trust Action Committee will eventually be out of a job, and c) Jim Rogers will have been proved wrong on his recommendation to buy farmland.

(Before we deal with these questions, a quick note related to my last letter: A friend pointed me to this article in, where the problem on liquidity being diverted back to shareholders in the form of share buybacks and dividends was exposed, before I would bring it up, on my letter of March 4th. )

A forensic analysis on dead currencies

When I think of hyperinflation, I think of dead currencies. They are the best evidence. There is a common pattern to be found in every one of them and no, I am not talking of six-to-eight-figure denomination bills or shortages of goods. These are just symptoms. Behind the death of every currency in modern times, there has been a quasi-fiscal deficit causing it. Thus, briefly, when someone asks: What causes hyperinflations? The answer is: Quasi-fiscal deficits! Why have we not seen hyperinflation yet? Because we have not had quasi-fiscal deficits!

What is a quasi-fiscal deficit?

A quasi-fiscal deficit is the deficit of a central bank. From Germany to Argentina to Zimbabwe, the hyper or high inflationary processes have always been fueled by such deficits. Monetized fiscal deficits produce inflation. Quasi-fiscal deficits (by definition, they are monetized) produce hyperinflation. Remember that capital losses due to the mark down of assets do not affect central banks: They simply don’t need to mark to market. They mark to model.

The only losses that can meaningfully affect central banks stem from flows (i.e. deficits), like net interest losses. These losses result from paying a higher interest on their (i.e. central banks’) liabilities than what they receive from their assets. These losses leave central banks no alternative but to monetize them, in a deadly feedback loop. They are like black holes: Once trapped into them, there is no way out, because (fiscal) spending cuts are no longer relevant, unless they produce a surplus material enough to offset the quasi-fiscal deficits. And that, by definition, is impossible.

This raises questions like: Why would a central bank need to pay interest on its liabilities? Why would the monetization of the losses necessarily lead to a spiralling process?

Why would a central bank need to pay interest on its liabilities?

This is a key point to understand inflation. According to mainstream economists, inflation is a process that pops once the potential output gap of a currency zone is eliminated. Inflation is the consequence of reaching full employment of resources, they say, and place the situation within the context of “hydraulics”.  In the figure below, I illustrate this context, showing two glasses: One is not full, and therefore, there should not be inflationary pressures.

Please, do not laugh at the figure. It also contains a citation from a speech given by Fed’s Governor Jeremy C. Stein a few months ago, that uses this same metaphor to illustrate how the Fed thinks about their policies. If it wasn’t so sad, it would be comic. And it is sad because there is absolutely no historical evidence of a nation sustainably living under inflation that would have reached full employment. In fact, it is quite the opposite: Inflation breeds unemployment, which breeds shortages and further inflation. This is why this whole situation is so sad. Millions of lives have been and will continue to be ruined because of this error.

The truth is however that inflation and financial repression are inseparable. They are different faces of the same coin, and as inflation develops, financial repression morphs into plain confiscation. As at December 2012, we have only had increasing financial repression, mostly in the form of price manipulation. Some of this manipulation is open, as with interest rates, and some of it is covered, as with gold, the consumer price index or the unemployment rate. But as the US fiscal deficits grows, the manipulation will be increasingly open and the fear of confiscation will be very tangible. Yes, the manipulation will be so open that even the GATA (Gold Anti-Trust Action Committee) will completely lose its raison d’être. It will be worthless to expose what will be public.

With regards to the fear of confiscation, there is a good example in the drop in deposits from the banks in the periphery of the Euro zone. Any rational investor could see that his bank was being coerced into purchasing the worthless debt of its sovereign and that the likelihood of being caught in a bank run was exponentially rising. Policy makers in the Euro zone chose not to confiscate. It was too early to do so, in the presence of other alternatives. But deposits dropped nevertheless, and to restore them, the European Central Bank will have to pay higher interest rates on its sterilized purchases, when it finally engages in Open Monetary Transactions (i.e. purchase of sovereign debt with maturity under three years). I explained this in September: Since the backstop of the ECB removes jump-to-default risk from the front end (i.e. 1 to 3 years, in sovereign debt), selling the sovereign debt to the central bank for cash will be a losing proposition for banks. The Euro zone banks will demand that the purchases be sterilized, to receive central bank debt in exchange and at an acceptable interest rate. This rate will have to be higher than it currently is. This is why, in my opinion, we are seeing a stronger Euro and weaker Treasuries.

Why would a government want to maintain a certain level of deposits?

Governments need bank deposits to fund the bonds they force their banks to buy. The regulations, the pressure on the bankers, the open threats are all part of the same means to coerce bankers to fund their debts with your savings. Is this what was behind the failed moves in 2012 to destroy the US money market funds?

Essentially, hyperinflation is the ultimate and most expensive bailout of a broken banking system, which every holder of the currency is forced to pay for in a losing proposition, for it inevitably ends in its final destruction. Hyperinflation is the vomit of economic systems: Just like any other vomit, it’s a very good thing, because we can all finally feel better. We have puked the rotten stuff out of the system.

Why would depositors not want to renew deposits?

Whenever the weight of deficits passes a certain milestone, people begin to flee en masse from the system. They not only take their savings from the system, but they generate income outside it too. This has happened since times immemorial. Below is a picture of buried coins, found in Hertfordshire. They are presumed to have been hoarded in 4th century during the final years of Roman rule.


Then and now, the tax pressure ended breaking capital markets and trade. In the early stages, everyone seeks to stop investing and collect by any means whatever capital that can be recovered. Nobody should be surprised if, with these low interest rates, the wave of share buybacks and dividend payments increases. The shrinkage of the system exacerbates the fall in tax revenue and the intervention of central banks, leading to the self fulfilling outcome of quasi-fiscal deficits. Production falls and the shortage of goods, together with the increase in the circulation of money, triggers high inflation. Price controls follow.

If this is correct, Jim Rogers is wrong and you should not buy farmland. Farming will not be profitable. The increase in food prices would not be a signal to encourage farming, but the reflection of the fact that farming is not profitable because it is easy to tax. Hence, the food shortages. The same applies to real estate in general, as the rule of the mob spreads and the rights of debtors and tenants are favoured over those of creditors and landlords. Hyperinflation therefore is not just a run from a currency, but from the economic system entirely. Thousands of years of Diaspora are screaming to us in the face that the advantage of gold as an easy-to-transport and store asset is not to be underestimated.

Why have we not seen a quasi-fiscal deficit yet and how close are we too see one?

I think that at this point one can easily see how high nominal interest rates (to attract deposits) and hyperinflation go together. The loss of confidence in the system pushes nominal rates higher, which causes even more pain to produce, unleashing shortages of goods and higher prices. Von Mises, for instance, remembered that in the case of the German hyperinflation, “…With a (my note: nominal) 900 per cent interest rate in September 1923 the Reichsbank was practically giving money away…” (Chapter 7, in “Money, Method, and the Market Process”).

Frankly, I do not have a definitive answer to the question of why we have not seen a quasi-fiscal deficit yet. But I can intuit that we are still far from seeing one. There are many factors at play. The existence of coercive pension plans (i.e. monies coercively taken from salaries to fund collective distributions) could be playing an important role. These funds are “other peoples’ monies” to their managers and they will not risk their careers to protect them from governments that force them to assign a zero risk weight to US Treasury holdings. It is conceivable that as funds are burdened with losses, the contributors wake up to them and decide that at a certain point, one is better off working outside the system than in it, to avoid this hidden tax. Just like Romans left the city, millions of workers in the developed world may decide to become self-employed and leave the system. This is a typical characteristic of under-developed economies.

So far, the Federal Reserve does not even need to sterilize what it prints. The European Central Bank did have to sterilize but the market does not demand an interest rate on its liabilities, higher than that of the sovereign debt it purchases. Not yet…Perhaps because the market somehow still believes that institutional structure of the European Monetary Union is fixable. Further downgrades in the risk rating of core Europe, the concurrent rise in the yields ofGermany’s sovereign debt and corporate defaults in USD denominated bonds will eventually wipe this belief. For now, the European Central Bank has been successful in not even having to pay interest on deposits.

If I have to think of a main and most likely trigger of quasi-fiscal deficits, I have to name the future bailout of the next wave in corporate defaults, particularly from the Euro zone.

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Racer's picture

Banking system  = fractal destruction cycle

formadesika3's picture

Long before we reach hyperinflation, your savings have been wiped out.

formadesika3's picture

Forgot sumpn.

... unless you save in gold & silver.

bigmikeO's picture

I'm guessing that our "dear leaders" are thinking that we can muddle our way through for 20 more years like Japan.

The thing I'm concerned about is that everything moves a whole lot faster than yester-year. Facebook, Groupon, Pinterest - the Internet can accelerate at breakneck speed, so the 15 minutes after "The View" does a story on "should you spend all of your money asap?" hyperinflation kicks off and then ends within 6 months. (With lots of death and destruction).

BraveSirRobin's picture

It seems the current bubble is in guns and ammunition. Of all the bubbles to worry about, perhaps this is the one.

sessinpo's picture

Or it might be a bubble multi decade bubble in liberalism and ignorance. In which the ones that need to worry are the liberals - they just be about ready to pop in a bad way.

spinone's picture

Interest rates will never have to go up in the USA, as long as the dollar is WRC the Fed can monetize as much as it wants.

Al Huxley's picture

Yep, lucky no other country out there is angling to take over the role of WRC provider.  Infinite prosperity for everybody.  I'm just looking forward to the day when all taxes are abolished and everything is just outright monetized without consequence.

Assetman's picture

... this assumes that the Fed is the marginal price setter for pricing what is considered "risk-free" Treasury assets across the curve.  Today, that is certainly the case.

Tomorrow?  Who knows?



Flakmeister's picture

We'll be fine along as the House of Saud stays in power and there is more net exports of oil on the market than there are net US imports...

Upper limit 20 years.... tops...

Edit: For perspective, check this out...

Body of Lies's picture

You are right about Saudi Arabia ... and if you are looking for trigger event it will be th fall of Saud.

1) Saud falls

2) Crisis prevails worldwide in oil pricing (If Obama is in office we're screwed, if a Bushie is there we have a chance by taking over Saudi Arabia)

3) Islamists come to power rapidly IN SA

4) They refuse US dollars for oil payment (demand gold only) since they are ideology driven, the money is not so important.

5) Energy rationing in US, colossal depression results

6) Dollar collapses as everyone tries to 'redeem' them for tangible assets

7) Reset ... whatever that means

ball-and-chain's picture

I asked my mother what causes hyper-inflation.

She says its velocity.

Picture this.

Bernanke's man-tits are squirting milk to the hungry (his banker friends.)

But there is so much hunger in banking land that his milk isn't distributed to the regular folk.

Hence, no big spikes in inflation.  Why?  No velocity.

But what does she know?

becky quick and her beautiful mouth's picture

jim rogers (and me) advocate buying farmland so that you will not starve to death while the 'smart people' with underground food bunkers try to figure out how to 'save us.' 


buying farmland is investing in 'staying alive, live, live, live, livvvvvvvvvvvve.'

Flakmeister's picture

Just make sure that you have water....

Which eliminates a lot of places...

kaiserhoff's picture

Farm land is a great place to keep your gold, guns, etc.  I've never quite understood what any of the prepping supplies are worth unless you are part of several counties of folk who think and act like you.

Getting more interested in specialty crops.  I hate tobacco, but I've noticed those who are so inclined will pay almost anything to get it.  Gray market, Bitches?

JohnG's picture



Prepping "supplies" are a method to get going.  Gardening is a steep learning curve, as is animal husbandry, meat preservation, etc.  Water is essential of course.

One will need tools, and the skills to use them.  I would like to be warm when the lights go out, and I will be.  Preserving vegetables, while not hard, takes supplies and know how.

Moral: Get some seeds and learn how to grow them.  It will be at least two years before you have a meaningful harvest.  Prepare now or starve.  Learn to hunt, clean and preserve animals.  Learn to raise them.  Learn to find water.

There is much to learn, do it now, or die.

Diogenes's picture

Everybody laughs at the hillbillies but they will go under last, if at all.

Flakmeister's picture

Sure, that was never in dispute...

The question is do you want to live like that now....

ultimate warrior's picture

The way I look at farmland is (1) you don't need or want a lot of it (confiscation/theft could result if you have to much land) (2) Store what you can but sell extra produce at inflated price to pay off debt at fixed interest rates i.e. mortgage. (This was done in Weimar Republic). Farmland could possibly be a lifesaver.


vast-dom's picture

you miss the point: it is about taxes on farm production and just as importantly and unmentioned in above article, the gov jacking up RE taxes, which will occur 100% and thus extract from you wealth, whether saved in fiat or buried on said RE in form of PMs. 

BraveSirRobin's picture

Also, land can not be moved or hidden. Time and again, governments have taken land from their owners and given it to its preferred constituencies.



vast-dom's picture

hence the leverage of renters and non-land owners as per above article. 

ultimate warrior's picture

The government can only jack up taxes so far especially in a hyper-inflationary environment. Eventually the public will say get fucked while stroking their AR15. The black market will be flourishing and the government will be limited in their actions.

Body of Lies's picture

There will no black market ... with everyone armed and the level of morality in the American psyche we become a Mad Max world with the strongest strong man in the area trumping all others. Take a look at criminality in the US ... Gangs can and will rule in the black market just as they rule the black market in drugs. One season of produce will mean a dead farmer. We become Somalia.

You worry about Gov taking your produce ... at least they leave you alive

Rusty Diggins's picture

The point that is missed in the "buy farmland" meme is that you do not need very much for you and yours.... 10 acres will do quite well for a dozen paople.

Body of Lies's picture

I had a plum tree ... watched it every day until one day all the plums were gone ... warefare over farmland will result if it gets that bad

haskelslocal's picture

Why is this story so full of shit?

drbill's picture

What an insightful comment...

I am a Man I am Forty's picture

It also helps if you are a smaller country that no one likes or that a bunch of other countries are aligned against.  Europe against Argentina, world against Weimar Germany, Zimbabwe because it is easy.

notadouche's picture

Well I don't know about not seeing hyper inflation.  OK maybe not hyper in the technical sense but when you compare the real cost of fuel, food, college tuition, healthcare, prescription meds, insurance, housing we are seeing plenty.  It would perhaps be useful to measure inflation by the same definition as they did in say 1950 and compare.  These govt stats are so watered down and manipulated now who knows what to believe.  The planners have a number they want to publish and then work their way back to make the math work.  Also measure the amount of food, any packaged food today vs what you were paying for 5 years ago and tell me there is no inflation.  Same bag, a little bit more in price and a lot less in product.  Smells like inflation to me.   

balz's picture

Food is easy to tax ?

Go and try to tax that carrot out there in my garden that i will eat tonight.

Body of Lies's picture

Food on tax, and I'll get the carrot from your garden LAST Night

blunderdog's picture

It's really just not likely we'll see hyperinflation in the USA until a meaningful alternative medium for exchange exists. 

akak's picture

What has any alternative currency got to do with chronic governmental overspending, rising debt and its concurrent monetization?  Your argument, heard so often, is in fact so lame and intellectually insulting it is laughable.

Just for one example, the Romans' lack of any "alternative medium of exchange" did not prevent the utter debasement (hyperinflation under the specie system) of the denarius in the third century AD from happening nevertheless, leading to the effective (and permanent) death of the money-oriented economy in the (Western) Roman Empire.

blunderdog's picture

What has any alternative currency got to do with chronic governmental overspending, rising debt and its concurrent monetization?

Nothing at all, but those things are not hyperinflation. Hyperinflation is loss of faith in the currency to the extent that it can no longer be used as medium of exchange.

In the USA, in order for the "dollar" to go out of use, something else will have to be available. Too much of our entire SOCIETY is dependent on exchanging colored paper for it to *end*--it has to be subsumed by something else.

Once we have other options, like easily located barter-exchanges, or alternative means of transacting business, it'll be easy to dump the dollar.

Payne's picture

There is a run on the Banks today it is called default.  $178 Billion in defaults today on mortgages.  That is a hefty run on the bank.

AUD's picture

Hyperinflation in $ terms is a run on the bank that issues the $.

ramacers's picture

fed can't eat that balance sheet any more than bonds will move at any rate when the jig is up. sh-- will hit the fan and blood will flow.

Bicycle Repairman's picture

Money shot:

"...the tax pressure ended breaking capital markets and trade.  [...]  If this is correct, Jim Rogers is wrong and you should not buy farmland. Farming will not be profitable. The increase in food prices would not be a signal to encourage farming, but the reflection of the fact that farming is not profitable because it is easy to tax. Hence, the food shortages. The same applies to real estate in general, as the rule of the mob spreads and the rights of debtors and tenants are favoured over those of creditors and landlords. Hyperinflation therefore is not just a run from a currency, but from the economic system entirely."

Head for the hills.  Your guns get used only if they corner you.

JR's picture

The way to crush the bourgeoisie is to grind them between the millstone of taxation and inflation.

That’s Vladimir I.Lenin. And what’s more that’s the two-party tag team of Washington, DC, Obama and the GOP arm-in-arm with Ben Bernanke -- stealing, cheating, compromising and enjoying their positions.

The American Thinker writes: We have seen this before.  Lenin triggered inflation to eliminate the Tsarist monetary system, which he planned to replace with centrally-managed rationing.  He increased the money supply twenty-five fold." 

Obama cares no more about America’s children or her elderly than did Clinton’s Jewish Secretary of State, Madeleine Albright, who said  the “price” of 500,000 dead Iraqi children for U.S. sanctions on Iraq was worth it.

Case in point: The New York Times is reporting Obama will cut social security, but spare the Pentagon, by drastically reducing the spending power of America’s elderly using  CPI gimmickry.  It comes as no surprise,  in that Obama made a promise to international banker Bob Rubin in 2006 that he would do just that.

And while the cost of seniors’ non-discretionary spending soars, Security benefit payments will rise by only 1.7 percent in 2013.

Obama’s spending cut proposal cuts $122 billion  by "adopting a new measure of inflation that slows the growth of government benefits, especially Social Security,"  even though, as Don Smith writes on OpED News, Social Security hasn't contributed a penny to the deficit.

In fact, according to Paul Craig Roberts in a recent article: “For the past quarter of a century the Social Security portion of the payroll tax has built up a surplus of over $2 trillion.”

Obama’s “stealth redistribution strategy” is merely robbing the old to finance SSD and Medicaid for his constituents, including the bankers. A fellow I know (I’ve actually had to help him out), has been addicted to drugs for years, has no job and every month the government puts a sizable cash deposit into his checking account. And then he was angry because I don’t care for the poor. Why? I didn’t vote for Obama.

BraveSirRobin's picture

Social Security was already looted long ago. Nothing in the lockbox except IOU's to ourselves.

JR's picture

Exactly. The Congress has been busy looting Social Security and other “untouchable” monies to use as general revenue for their favorite vote-getting programs. Then they simply add what they steal to the Federal debt figure but not to the yearly deficit and leave a worthless IOW in the Trust.

As to why the sum of the yearly deficit and the accumulated federal debt doesn’t add up to a new total for federal debt, the answer they give is that these disparities don’t show up because “we owe it to ourselves.”

In Human Action, Austrian economist, Ludwig von Mises, wrote regarding this economic accounting abyss and "owing it to ourselves":

“The most popular of these doctrines is crystallized in the phrase: A public debt is no burden because we owe it to ourselves. If this were true, then the wholesale obliteration of the public debt would be an innocuous operation, a mere act of bookkeeping and accountancy. The fact is that the public debt embodies claims of people who have in the past entrusted funds to the government against all those who are daily producing new wealth. It burdens the producing strata for the benefit of another part of the people.”

Congress is responsible for this grave injustice to the American people. And now you know why the bankers such as Rubin want to do away with SS: it ain't there.

Bicycle Repairman's picture

The SS fund hasn't been looted.  That's bullshit.  Cut the defense budget and all the money is there.

Run the numbers.  Take defense spending and pay SS.  The IOUs are still there.  Do you know what IOU means?  The empire was fun for some folks.  Show's over now.

Body of Lies's picture

It works the same in my house ... I sock away money in the Boodle Bag and match it with an equal increase balance on my credit card and say 'I'm saving', but in reality, I'm going farther behind for each dollar I 'save' because I get no interest on it, but have to pay interest on the money I borrow.

Unfortunately for us the Gov keeps a huge increasing credit card balance and robs the Boodle Bag at the same time

DavosSherman's picture

I'm not a huge rogers fan, but he's right, barring a population adjustment.

AGuy's picture

Hyperinflation happens when Investors, consumers and business lose faith in it. Currently our trading partners still accept US Dollars for transactions, and have been holding on to surplus dollars caused by trade imbalances. Some trading partners have smartened up, like China, by converting their US Dollars into tangible assets (PMs, Land, rights to natural resouces). The dollar will tank when other join into China's diversification program, as there will be excessive number of countries willing to chase a small pool of tangible assests, and those with tangible assets are less than egar to trade assets for dollars.

Consumer Credit, and Domestic Consumption are meanless for causing hyper-inflation. Consider hyper-inflation in Argentina, and the Former Soviet Union. During the period when currencies collapse, domestic unemployment, consumption and credit was deflationary. This is because the citizens had no money to spend and no access to credit. Domestically, they were in a state of deflation, but globally their currencies were distrusted. The lost of external confidence crushed the Ruble and the Argentina dollar.

When Hyperinflation does arrive, It will be very devistating for Americans, since few are Americans are self-reliant, and America is very very depend on imports (energy, raw and manufacturered goods). I sudden collapse of imports would bring the American economy to a complete standstill.

Counterfiat's picture

Fail sorry. Back to the chalkboard you go.

Why post half baked articles like this?