Is hyperinflation coming to the U.S., Britain or Japan?
Hyperinflation in the eurozone would be a better bet.
So says James Montier, of investment management firm GMO, in a new
white paper titled “Hyperinflations, Hysteria and False Memories.”
Montier picked up an interest in hyperinflation as a child as a
result of his father’s smoking habit. At the time, exotic bank notes
were packaged with cigarettes. Montier senior passed a collection of
these on to his son… including a 1 million mark note from the Weimar
Republic.
Montier examines hyperinflation episodes in:
- German Weimar Republic (1922-23)
- Hungary (1945-46)
- China (1937-49)
- Bolivia (1984-85)
- Brazil (1987-94)
- Federal Republic of Yugoslavia (1992-94)
- Georgia (the country, not the state — 1992-94)
- Zimbabwe (2007-09)
And after going through this laundry list of hyperinflation episodes and causes, Montier concludes:
To say that the printing of money by central banks to finance
government deficits creates hyperinflations is far too simplistic
(bordering on the simple-minded). Hyperinflation is not purely a
monetary phenomenon. To claim that is to miss the root causes that
underlie these extraordinary periods.It takes something much worse than simply printing money. To
create the situations that give rise to hyperinflations, history teaches
us that a massive supply shock, often coupled with external debts
denominated in a foreign currency, is required, and that social unrest
and distributive conflict help to transmit the shock more broadly.
Money printing alone does not light the hyperinflation fuse. Something major has to go haywire — courtesy of an outlier such as war, supply shock or crushing external debt load.
This is why Montier concludes the eurozone is actually a larger hyperinflation risk than the U.S., Britain or Japan.
This is because, although these three countries are racking up huge
debts relative to their output, all three also borrow in their own currency and have relatively stable politico-economic regimes.
The eurozone, on the other hand, is made up of multiple countries
with huge external debts denominated in currencies they do not control
— think Greece, Spain and Italy — coupled with great anger at “the
system,” high potential for civil unrest (over 50% youth unemployment in
Greece and Spain), and serious breakdowns in basic stability
mechanisms.
There is a lot of hype these days about hyperinflation in the U.S.
But extreme amounts of government borrowing are more likely to slow down
the U.S. economy than speed up the arrival of hyperinflation, as
governments “crowd out” more entrepreneurial uses of funds and near-zero
interest rates cause capital to languish in stagnant pools.
When giant corporations can borrow for 20 years at 2% banks only
choose to make super-safe loans. More dynamic businesses can hardly get
capital at all. This leaves the real economy (as opposed to the paper
Wall Street version) in a quagmire.
This makes it hard for hyperinflation to kick in, as monetary
velocity — the speed at which money changes hands from one transaction
to another — falls.
Some prophesy a bond crash will usher in U.S. hyperinflation, as the
world decides to sell all its bonds overnight. But this is unlikely
because of what happens when bond prices fall: Long-term interest rates
go up.
That means, in the event of a bond “crash,” rates would spike,
leading to an economic crash… which in turn would pummel risk assets
and scare everyone into buying bonds again!
For mature economies such as the U.S., stealth inflation is a far
more realistic outcome than hyperinflation. This is usually how the
buying power of a currency goes down — not in great hysterical swoops,
but in humdrum dribs and drabs.
The best protection is hard assets. Make sure some of your wealth is
invested in stores of value such as gold and precious metals and real
estate. These are the best way to counteract the slow death of the
dollar.
And be careful of going long European stocks or the euro itself. If
history is any guide, it could be the next economy to fall foul of a
hyperinflationary episode.
Carpe Divitiae,
Justice
http://www.
