Has the US Reached The Hyperinflation Tipping Point?
Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures.
Guess what? The U.S. will hit the 40% mark in 2009:
Hayman Advisors provided a good summary of Bernholz’s research in their October letter (via FS):
There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations – all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.
It’s important to note that the dollar does have some built-in protection as the world’s current reserve currency. That lets us get away with a higher debt-load than we should be able to. The question is, how much protection does that offer?
Also, how long will the dollar remain the world’s reserve currency? As Bloomberg noted, the world’s reserve banks are shifting away from US dollars. They’re shifting to currencies from countries with sound(er) monetary policy and less debt. We’re really in uncharted economic territory.
“It can’t happen here”
Hyperinflation in the US is hard to imagine. It could never happen to us… right? Well, fiat money has always collapsed eventually. I wonder if people in those countries ever saw it coming. My gut says the vast majority never saw it coming, but every case is unique.
Hedging Against Hyperinflation
If we are on the road to hyperinflation, you’ll definitely want to be in commodities. Stocks may do OK, but generally don’t keep up with inflation during hyperinflation. The exception would be commodity producers, such as gold miners. Foreign currency funds are another way to play it. I did a writeup on two mutual funds I like as inflation hedges here.
Jim Rogers likes agriculture plays better than precious metals: Cotton, sugar, etc. I’m mostly using metals to hedge against inflation, but Mr. Rogers’ suggestions certainly warrant a closer look.
If you’re looking to read more on the topic, Peter Bernholz’s research is featured in his new book Monetary Regimes and Inflation: History, Economic and Political Relationships. Looks interesting, I’ll probably pick one up with my next Amazon order.
Hat tip to Michael Panzner. He has an excellent writeup on the risks here.
23 Comments
I think the bigger problem is the model of inflation itself which relies so much on appreciating assets in order to sustain a countries wealth (like the USA or Canada where I live). With the banks lending models you eventually run out of credit worthy consumers unless you sustain proper demogrphics and debt control. Extremely hard to do when the banking modelis based on increasing assets and mortgages which appear as assets on the banks sheets once again giving the impression that debt is positive. It isn’t unless you have positive growth in employment and sustainable production in the form of manufacturing and industrial output. Asset prices always collapse and have since economic records have been kept. Why people continue to fall for this boondogle is beyond me?
When debt is used to expand industry and capture market share it is good. The rest is quite simply “not good”.
It saddles government and consumers with unnecessary obligations which take away from ones ability to utilize resources for growth.
There is a tipping point but I do believe that it was reached long ago whenmentality turned to appreciating assets instead of proper demogrphic and manufacturing growth. That was about 20 years ago.
Thank you for a very interesting article. What I also find interesting is the title of your website “Bearish News”. Quoting Sir John Templeton, there is always a bull market somewhere. Your article supports a bull market in commodities and I am in agreement that my favorite counter inflationary investment is in gold mining. So your bearish news is actually bullish when viewed from another point of view. Maybe you should also publish the same article on a website called “Bullish News.” LOL
It’s important to note that the dollar does have some built-in protection as the world’s current reserve currency.
And the dollar has some rather more effectively protection in terms of a military larger than that of everyone else put together
Ultimately, if China or India or Europe or the Arabs cut up rough, we reduce them to a steaming slag-heap of radioactive trinitite. And don’t you think they know it!
Hyperinflation stopped in Weimar when Hitler came to power – and didn’t affect Nazi Germany until the GIs cross the Rhine.
The big unknown is the exent to which the US dollar’s status as a reserve currency will lead to a collapse of other currencies. There is no historical precedent for a paper currency so widely used.
Also, the dollars reserve status is a weakness, not a strength. The trillions of dollars held outside the US represent an interest free loan to the US treasury. As foreigners and foreign banks get uneasy about the dollar, those trillions will come flooding home, and will need to be replaced by real debt, carrying real interest.
Sinner,
I don’t know what you background is, but I’m a retired infantry officer who spent 26 years learning that the US may be able to destroy the world, but it cannot win a global conflict. In fact, we will come out on the short end because we have the most to loose. Has it occurred to you that we have been waging a global economic war since the end of WW 2. Our problem with communism had nothing to do with politics, and everything to do with the communist countries not buying into Bretton Woods.
Now the former major communist countries are eating us alive economically. Russia, China, and now Japan are forming a co-prosperity sphere with economic powers far exceeding those of the US. The Eastern nations are replacing our influence in Europe with economic power rather than military threats.
The US has nothing left to offer anyone. We have no industry, no raw material, second rate technology, and a collapsing infrastructure. However, we do have the banking industry, but all it manufactures is debt. We are a de facto third world country.
As far as military intelligence goes I’m still in the loop enough to know that the US military has absolutely no interest in taking on any, much less all, of the major players. Hell, Iraq is at the stage Vietnam was at when we bailed, and we don’t have much of a chance in Afghanistan. The best we can hope for is to get out before we go bankrupt.
I survived nearly 5 years of trigger time over 2 wars. My son is on his second tour, and up to his eye balls in it right now. You arm chair generals have no idea what it’s like. If you get the war you seem to want so badly you may be on the inside of the mushroom cloud looking out.
my impression has always been tht hyperinflation couldnt happen in an economy with a large bond market–like us
i suspect many if not all of those 28 instances happened in countreies with weak or no real bond market
no countery had a bond market such as ours
am i wrong?
It seems that the government agencies are teaming up against its own citizens.
I wrote my US Senator, who is on committee regulating the CFTC and banking about the manipulation of the silver market by hugh shorts banks are holding. The response, when this information gets into the committee we will explore this. Too late, they already know whats going on.
[...] From Bearish News [...]
The conclusion may or may not be correct, but it isn’t justified by the reasoning presented. The twelve worst cases of hyperinflation may indeded be associated with government deficit exceeding 40% of expenditure, but what we need to know is whether deficits exceeding 40% of expenditure always lead to hyperinflation.
To offer an analogy: Warren Buffett became one of the richest men on the planet as a result of sitting on his backside reading company reports all day. So if I sit on my backside and read company reports all day will I become one of the richest men on the planet ?
Inflation, hyper or otherise, seems to be damped substantially by the size of the economy. Pre-war Germany was a basket case, and so is Zimbabwe. We have endured years of fiat money idiocy. It will get worse. So far, the train wreck has been tolerable, and I expect that will continue. Stay out of debt, hide some assets, get healthy and competent, and stay that way.
The one person that most people in America, and the other nations of the world is forgetting is the One who created the Universe and all that is in it, including the planet EARTH that we live on. That person is ELOHIM our Abba Father, who was in the beginning. He is our GOD of might and strength, and He has this to say about WEALTH. $$$$$$.$$$$$$.$$$$$$.
Is it possible that all of the Big-Up Business People and all of the Political Leaders, including President Barack Obama and his DNC Administration, are saying to themselves:
“My brain power and the strength of my hands have produced this wealth for me.”
But God is saying:
“BUT REMEMBER THE LORD YOUR GOD, FOR IT IS HE WHO GIVES YOU THE ABILITY TO PRODUCE WEALTH, and so confirms his covenant, which He swore to your forefathers, as it is today.”
God also says:
“IF YOU EVER FORGET THE LORD YOUR GOD AND FOLLOW OTHER gods and worship and bow down to them, I TESTIFY AGAINST YOU TODAY THAT YOU WILL SURELY BE DESTROYED FOR NOT OBEYING THE LORD YOUR GOD.”
I believe that all of the violence,wars and subsequent distruction and deaths of millions of people, is a direct result of DISOBEDIENCE TO GOD.
Mankind has a choice to make:
OBEY GOD AND BE BLESSED….
DISOBEY GOD AND YOU WIIL BE DESTROYED
In response to Ronald.
Perhaps the rest of the world does not all believe in the same “God” that you believe in. Mine, for example, gave me free will, loves me regardless of my actions, did not write a book (or several of them ) and then put them into one book telling me what I “must do or else” as yours does. Strangely enough, he doesn’t threaten me with burning in hell forever If I don’t do his extremely contradictory “Will” as contained in your God’s book. I wonder why my God isn’t so insecure that he requires me, his product, (even after having given me free will), to worship him and to either conform to his ways or he will annihilate me and millions more like me. even those who have never been exposed to the book you call his.
“Love God and Love your neighbour” Ron, that’s the message, let the rest of us live in joy rather than your fear.
[...] Has the US Reached The Hyperinflation Tipping Point? – Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures. Guess what? The U.S. will hit the 40% mark in 2009: … Bearish News [...]
Well, if we look at the U.S. deficit in 1943 versus its expenditures, at least per the numbers I looked at, the percent exceeded 69%, which certainly exceeds 40%. And we seemed to have survived that without hyperinflation. And if I look at the 1943 expenditure versus total debt, the percent would have been even worse. We got one year of high inflation in 1947: almost 18%, but again, we and the dollar seemed to have survived.
I will not rule out hyper inflation as a possibility but it seems the author is suggesting that always, when a country’s debt exceeds 40% of expenditures we see hyperinflation. Not the case (see above).
Ronald, your posting was quite accurate! God owns everything including the “cattle on a thousand hills” and the fiat paper we call “money” (and the real money we know as gold). Hyperinflation is most certainly coming to the USA. Regardless, when we die we leave it all behind. What does it profit a man to gain the whole world and lose his own soul? “Fear God” is encouraged in the Bible and for those who choose to do what they want (with their “free will”)–the key tenent in Satanism, by the way–there will be repercussions (as there are with all decisions in life, spiritual or otherwise). It appears Peter has a rather distorted view of God, but he has the freedom in the West to believe whatever he wants. Heck, many people think that they are “God” and the masters of their own destinies…until the fragile nature of life takes someone they love away, or they get a strange disease or get paralyzed in a car crash…then they realize that their money god/idol will not save them. Only a relationship with YHWH will. The only one who proved his love by dying on the cross for them (and then rising from the dead proving his deity). It is a gospel of hope and love. I’m saddened that some cannot see that because of bad experiences with “hypocrites” or ingrained bigotry. 10 out of 10 will die and face our Creator. If we prepare for our temporary retirement financially but don’t prepare for our permament destiny spiritually, that is nothing but foolish.
XRGRSF,You have a very keen insight from a military point of view and real experience.And Mikie knows what he is talking about too.I think the goverment is seeing our country as the titanic sinking,so they send the hindenberg out to rescue it,hoping they can arive in disneyland with the wizard of oz characters clapping.The mirage won’t work.We are on a see-saw between deflation and inflation that is tipping towards deflation with the goverment trying to hold it up with money printing.If they eventually succeed in pushing it up,hyperinflation could take over.Or they will have to have a balancing act between the two creating stagflation or worse,a hyperinflationary depression.Get out of dept,Buy gold,silver,freeze dried foods,tools,survival gear,whatever you can afford.You don’t have to panic,just be prepared.
When you consider how China and BRIC nations have consolidated the Raw Material Resources in the world to a Majority holding , the struggle for these resources are whats going to cause super hyper inflation in the coming years . Its no wonder why there is a push for restructuring the Worlds Trade currency when the Intrinsic Value is not in the control of the US dollar to support it as reserve currency .
http://lunaticllama.com/2009/10/02/lithium-blogging/ , you know the BRIC nations are at work on Bolivian Lithium , and why not even place our Electric Car Battery needs in more leveraged position .
Leaders from Latin America and the Caribbean have agreed during a summit in Bolivia on creation of a regional currency aimed at reducing the use of the US dollar.
The decision came shortly after members of the Bolivarian Alternative for the Americas (Alba) gathered in the central city of Cochabamba for the start of the two-day summit, the AFP news agency reported.
http://english.aljazeera.net/news/americas/2009/10/2009101712255748516.html
http://www.wocu.com/ , here is an interesting organization on Currency Basket information on the function of what is evolving in the currency exchange fields….. I do believe that the dollar will have to integrate into this type of basket , or risk isolating the US markets from the rest of the world , because of the transactions by China / BRIC nations consolidation of the majority of natural resources around the world , and the isolating effect this has created on the dollars intrinsic value as the single reserve currency .
Dangerous Unintended Consequences
http://www.moneyandmarkets.com/dangerous-unintended-consequences-5-35849
We are entering a new cause /effect time for market valuation that is not going to be based strictly off supply demand data as much as who owns the resource supply , and what they might do with it , like restrict its use , because it needs to continue to satisfy its population , while a 100 million man army waits to interact if needs ………this is where the squeeze for resources is coming from and how Hyper Inflation over pricing of Commodities are going only one way ….UP !!!!!!!!!!!!!!!!!!!
Rare earths are vital, and China owns them all
http://www.marketwatch.com/story/rare-earths-are-vital-and-china-owns-them-all-2009-09-24?link=kiosk
PetroChina’s 60% stake in oil sands project may appear good for Alberta’s economy, but it’s bad for Darfur
http://www.africafiles.org/article.asp?ID=21681
China hails $US3b oil deal with Iraq
China hails $US3b oil deal with Iraq. August 28, 2008 … desperate for energy that it is prepared to make significant concessions to secure oil supplies, …
http://news.smh.com.au/business/china-hails-us3b-oil-deal-with-iraq-20080828-44xr.html
[...] This is when inflation occurs at such an extreme rate that the value of that currency basically disappears. There have been 28 instances of hyper-inflation over the last century according to Economist Peter Bernholz who has studied them. 20 of these have occurred since 1980. His study found one determining factor for Hyperinflation. Hyperinflation kicked in each time a government deficit exceeded 40% of its budget. In 2009, we will hit this number. You can read more about this here. [...]
[...] what’s the plan, Bernanke? Print, print, print. Nasty inflation is becoming more probable by the [...]
[...] dollar is dropping rapidly and will continue to drop more and more precipitously as the government prints more money to pay for programs we can’t afford to keep the voters happy so that the politicians will be [...]
see what is in the major newspapers; every hour world news, visit the link
[...] Sharp at Bearishnews.com states in the hyperinflation tipping point, “Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has [...]
[...] one key factor which determines when hyperinflations occur.Adam Sharp at Bearishnews.com states in the hyperinflation tipping point, “Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has [...]