Blog Exclusive: Hyperinflation- Just Say No

The following post was originally published for Seeking Alpha. The topic of this post is one close to my heart and due to a pressing need to share this knowledge, I’ve decided to publish this exclusively on The Occasional Contrarian instead.

As it becomes increasingly apparent that actually sitting down and dealing with the US debt situation is too much for economists, policy makers, and politicians to cope with, I am starting to see a few economists wondering aloud as to whether we should just leave things be, allow the Fed to send us into a hyperinflation and simply wipe out our debts that way. After all, hyperinflations typically do not last long, and one would tidy up all of that outstanding debt so that the US could start again, fresh, as it were.

A fairly prominent economic commentator, who shall not be named here, cheerfully observed recently that countries that inflate away their debts are not ostracized from the global financial community. After the dirty deed is done, and their balance sheets vastly improved, he found that memories are short, and lenders are delighted to return to lend once again, the financial risks having been massively reduced. With virtually all debts erased, repay-ability is not longer an issue. A little unpleasantness for a wholesale, debt-free, economic renewal seems like a reasonable price to pay!

Anyone who thinks this way, or actually writes such rubbish for popular circulation should have their economics degrees stripped from their walls, and they should be placed in one of those stocks of olden times. Then we’ll encourage the village children to throw rotten tomatoes and mock them. Hyperinflation has devastating consequences for any country that suffers it, and for anyone in the US to even contemplate such a course of action for that country verges on complete madness. Consider what happens in such events.


First of all, the size of the US economy and its total debts relative to the rest of the world is massive. US GDP may be ‘only’ 25% of global GDP but US indebtedness relative to total global indebtedness is much, much larger. It will not only be the US, therefore, that is affected by a hyperinflation, but almost everyone else. An Argentina or Zimbabwe(or even aGreece) that goes through such a process would have marginal effects on the world economy: the US would be another story altogether.

Next, the value of the currency sinks to essentially zero. Anyone holding US dollars would therefore lose everything that they had invested in them. I’m not talking about the dollar bills in your wallet, of course. I am talking about any US government bonds that you might own, your bank account, half or probably much more of your savings if you are more or less typical of most folks, everything invested in US denominated corporate bonds, and so on. And that is just for starters. The solvency effects on foreign banks which have large investments in US treasuries could cripple global business and trade on a massive scale. And anyone who thinks that at least those pesky Chinese, who refuse to revalue their yuan to unreasonable levels to help out debt-laden Americans, will get their comeuppance when their trillion or so of US dollars also goes up the flue, should have another think. China already does not trust the US to maintain the value of their currency: just try to get a hyperinflation going in the US and watch what they do with their US holdings. Of course, if anything, the Chinese would then help speed the decline of the value of the US dollar, which would be, after all, the object of the exercise. Somehow, I don’t find that comforting.

For the huge numbers of retirees and near-retirees, consider the effects on their pension plans. Corporations certainly could not keep up with the cost of living increases that would skyrocket in a hyperinflation, so anyone in the corporate retirement system would essentially lose their retirement income. Could government plans keep up? Only the federal government plans would have a hope: state and local plans would fare no better than corporate plans. Even at the federal level, however, I suggest that keeping up would prove to be politically impossible, such would be the public outcry.

Interest rates would, or course, go to infinity – assuming that one could even get credit. Roll your mortgage over? At 90% or more? Good luck to that. Anyone with debts now would only enjoy an illusory respite as rising interest rates and the rapidly increasing cost of living wiped out the hoped for gains that the massive decline in the value of one’s debts should produce. In serial hyperinflationary countries such as Argentina, people know how to cope with this periodic madness. Most keep their serious money in other countries and other investments. In theUS, most Americans haven’t a clue as to how to protect themselves, and the scale would be so massive in any case that protection would be almost impossible, except for a lucky few perhaps. This would then wipe out the middle class in the US, as occurred in Weimar Germany 90 years ago, as rapidly rising costs of basic living erased any hoped-for benefits that was supposed to come from paying down your debts in devalued dollars.

Unemployment? Imagine the effects of skyrocketing interest rates (and removal of effective subsidies) on small businesses and new business formations. If we are concerned that this is way too slow now, try putting the whole process in reverse. 9.2%, or 17.6% – depending on the way that you measure unemployment – would be nothing compared to what would happen to the US employment rate in such a case. In any case, how could anyone expect businesses to keep up the cost of living value of employee’s salaries with the rate of inflation?

‘Earmarks’ and industry subsidies? All gone, of course. There are many people who would think that this would an outcome devoutly to be wished! But the impact at the time would simply add to the general devastation and unemployment.

Do you think that the stock market would go berserk so you could hide there? It is to laugh! Prices of raw materials, labor, and so on would be tough to pass on when the purchasing power of the dollar was plunging and profit margins would vanish. The last time that the US suffered from a high rate of inflation, the stock market sank – by the end to very low levels. And inflation never ran to more than the ‘teens. Even large businesses would have a hard time getting reasonably priced credit. Rapidly increasing rates of bankruptcy would be more likely than a soaring market. Markets following such events usually do rise rapidly and powerfully – but not during the hyperinflationary event. In any case, who would have the loose cash to be investing in stocks?

Historically, hyperinflations, once they really get going, do not last long. But “fast” Hyperinflations are never fast: they just look that way in retrospect. A hyperinflation that “only” lasted a year or so, but destroyed your savings, your job, your company, your pension, and maybe the ownership of your home, would seem forever. And it would leave a legacy of bitterness and political divisiveness that is hard to envision, let alone describe. One or more of the mainstream political parties would be wiped out, of course (the one in power during the hyperinflation), but heaven knows what would replace it. There is a real nut element in the US (and I do not mean the Tea Party which is, correctly, anti-debt and anti-inflationary), as there is everywhere, but it would not be long shot odds to expect that they would come to the fore to take advantage of the profound feelings of disappointment and loss. A Hitler-esque kind of political outcome? Nah, it couldn’t happen in theUS…or could it? Think: an ‘economic Joe McCarthy’ in power.

Do you recall the famous Bill Cosby skit in which God directs Cosby, playing Noah, to build an ark? When a friend asks him why he is building it, Cosby/Noah can’t tell him, of course, but he gives him a hint: “How long can you tread water?”. A “quick” hyperinflation would, unfortunately, last much longer than 40 days and 40 nights. If you couldn’t tread economic water for even that long assuming that your savings and maybe your job were wiped out, then forget hoping that within a year or so it would be all over and things would start anew, debt-free and ready to roll.

So, the next time that someone within your earshot suggests that hyperinflation could be a solution to the debt problems of the US(or any number of other countries around the world), contemplate the bitter reality of what they are talking about, and tell them to take a long walk off a short pier. Then help them, if necessary.

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About rosshealy

C. Ross Healy, MBA, CFA Chairman, Strategic Analysis Corporation Ross Healy began his investment industry career in 1965 as a securities analyst for Midland Osler Securities. He was a co-founder of Sceptre Investment Council in 1970, a leading Canadian money manager. In 1984, he became Director of Research at Merrill Lynch Canada, and during this time provided support for the late Dr. Verne Atrill, the theorist who decoded the mathematics underlying the Theory of Accounting Dynamics upon which the Strategic Analysis Corporation (SAC) methodology is based. After supporting and collaborating with Dr. Atrill for many years, he joined SAC as Chairman and CEO in 1989 following the death of Dr. Atrill. Ross Healy is a past president of the Toronto CFA Society, and served on the board of the Financial Analysts Federation (now the CFA Institute) as Chairman of the Financial Analysts Journal committee, the academic arm of the CFA Society. He has served on the Financial Disclosure Advisory Board of the Ontario Securities Commission, and was a member of the Executive Committee of Trinity College, University of Toronto, chairing the Investment Committee. He currently serves as the Chairman of the Board of Trustees of Eglinton St. George’s United Church of Toronto. He contributes investment analysis to print, radio, and television media, and has been appearing regularly on Business News Network (BNN) for the past 15 years, and the Canadian Broadcasting Corporation (CBC). There is an award-winning book written about his analysis leading up to the collapse of Nortel Networks (The Bubble and The Bear, How Nortel Burst the Canadian Dream, by Douglas Hunter, Doubleday Canada, 2002. He was the “Bear” in the book.). Email Address: rhealy@strategicanalysis.ca Company Website: www.strategicanalysis.ca Telephone (work): 416-498-3604 x 133 Cell: 416-258-8342
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