More about our prospects for higher inflation

 

Last month I published an article titled "Are we facing higher inflation, or even hyper-inflation, in the near future?"  In it I pointed out:

There are many economists who assert that the USA is in a different position to the Weimar Republic or Zimbabwe, because the US dollar is the world's reserve currency.  It underpins the current world economic order.  We don't have to buy dollars to pay our debts;  we can simply print them.  However, there are strong pressures to change that, particularly from China.  If the dollar should lose its dominant position in international trade, a great deal of the support for its value would fall away.  The USA would then have to buy foreign currency with dollars to purchase goods and services from those nations that preferred non-dollar payments.  A weaker dollar would buy less foreign currency, greatly increasing costs - and giving rise to a greater rate of inflation internally.

There's also the fact that massive, artificial generation of currency without underlying economic activity to justify it has been a factor in every previous incident of hyper-inflation of which I'm aware.  We're doing precisely that in the USA today, on a truly massive scale.  I don't believe it's sustainable in the long term without similar consequences to those every previous offender has experienced.

There's more at the link.  If you didn't read that earlier article, I suggest that you do so before continuing with this one.

Alasdair Macleod, writing at Goldmoney, has just expanded on that concern in an article titled "Hyperinflation is here".  He states baldly that the expansion in US money supply is itself proof that we're already in a period of hyperinflation.  He uses sources such as the Chapwood Index (frequently mentioned in these pages) to prove his point, which I find convincing.  Here's an excerpt.  Emphasis in the text is in the original.

Definition: Hyperinflation is the condition whereby monetary authorities accelerate the expansion of the quantity of money to the point where it proves impossible for them to regain control.

It ends when the state’s fiat currency is finally worthless. It is an evolving crisis, not just a climactic event.

. . .

To understand why hyperinflation is already with us is to know what constitutes hyperinflation. It is not rising prices, or a condition that exists when prices increase above a predetermined rate: rising prices are the consequence of both inflation and hyperinflation. As Milton Friedman put it, inflation is always and everywhere a monetary phenomenon ... Have a look at US M1, the quantity of narrow money in the American economy, shown in Figure 1.  (Click the images below for a larger view.)

The progression of annualised monetary inflation from under 6% before the Lehman crisis, to 9.6% subsequently until March this year, and 65% in the thirty weeks since is clear from the chart.

. . .

The degree of the dollar’s loss of purchasing power is deliberately understated in official statistics. Originally, the policy was to reduce the cost to US and other governments of indexation introduced following the 1970s decade of price inflation. It is remarkable that the statistical suppression of changes in the general level of prices, now adopted in all advanced economies, is rarely questioned. Consequently, the scale of the fall in the purchasing power of fiat currencies has been ignored with some important consequences, at least for governments and their central banks, which are concealing evidence of the failures of monetary and economic policies.

Figure 2 compares the cumulative increase in the general level of prices measured by the CPI, and the Chapwood index — comprised of “the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation” ... Additionally, the growth of M3 money supply is included.

... the cumulative price effect of the official cities’ CPI over the last ten years is for it to have risen by only 19%, compared with the Chapwood index which rose 159%, compounding by about 10% annually. By way of confirmation that the Chapwood figures are closer to the truth, we see that USD M3 diluted the dollar by increasing 109% over the period.

. . .

Figure 3 further illustrates the ineffectiveness of monetary policy by expressing GDP in 2010 prices adjusted by the CPI (the state’s version of real GDP), by the Chapwood index and finally by M3 money supply.

Measured by the CPI, by end-2019 the economy had grown by nearly 22% over nine years “in real terms”. But because the CPI is a heavily suppressed measure of price inflation, the truth is different. The Chapwood index and USD M3 tell us that adjusted by these measures, GDP has more than halved from $15,241bn to $6,818 and $7,309bn respectively, measured by a base of 2010 dollars.

. . .

Anyone with an eye for the economic consequences of all these developments can only conclude that in addition to the already growing gap between government spending and tax receipts, governments are not just having to rescue their tax bases from a one or two-off hit from the coronavirus, but further rounds of inflationary expansions will follow at an increasing pace. Purely in terms of money quantities, hyperinflation is already well entrenched for the US dollar and all other fiat currencies subject to the same political and factual dynamics.

There's much more at the link.  It's heavy on economic technicalities, which makes it less accessible for those who aren't familiar with them, but it's worth reading in full, IMHO.

Do please note these two critical sentences excerpted above.  I'll repeat them, for emphasis.

"The Chapwood index and USD M3 tell us that ... GDP has more than halved from $15,241bn to $6,818 and $7,309bn respectively, measured by a base of 2010 dollars."

"Purely in terms of money quantities, hyperinflation is already well entrenched for the US dollar and all other fiat currencies subject to the same political and factual dynamics."

Those are powerful claims . . . but the author backs them up with hard data.  I find his argument convincing.

More supporting evidence is provided by Mish Shedlock, who notes that "23.6% of All US Dollars Were Created in the Last Year".  The graphs at that article are well worth a look.  They're scary.  Mish calls it the "Greatest Year-Over-Year Money Supply Surge in History".

What can we do about it?  As individuals, almost nothing, except to make sure that we stock up on critical, essential items while we can still afford them.  If (say) a widget now costs $1, and in a hyperinflationary environment might soon cost $10, it's doubtful that our personal money supply (i.e. what we can earn) will grow to the same extent.  Therefore, better to have a supply of widgets already on hand, and already paid for, so we can use them as needed, rather than be forced to do without.

However, for the fortunate few whose income can be expected to rise as inflation increases, or who already have a store of negotiable wealth, they may find it much easier to pay off old debts.  If our dollar income rises by 50%, it's unlikely that their old debt's interest rate will increase by the same proportion;  so they'll be able to pay it off with our devalued dollars.  That'll help them, but it won't help those to whom they owe money, because they won't receive the original monetary value of the debt when they're paid - only the devalued one.  That's how some people managed to make fortunes in the Weimar Republic during hyperinflation there - they used their wealth to buy up hard assets at pennies on the dollar, so that when hyperinflation was over, they had those assets in hand instead of worthless currency.

I continue to believe that a serious increase in inflation, if not actual hyperinflation, is - although not certain - far from a remote possibility.  I can only suggest that we all take note, and make what preparations we can.

Peter