Hyperinflation: This is how it happens

Money printing combined with a collapse in production of goods and services in the US

Image: Stacks of German Papiermarks in Weimar Republic Bank circa 1922

Let me start off by first saying I don’t think the United States will experience hyperinflation. But if the U.S. were to, the government is doing everything it can to make it happen. Does that make sense? I’ll explain the hurdles to hyperinflation later on, but first, let’s define it.

What is hyperinflation? Merriam-Webster Dictionary defines it as, “Extreme economic inflation with prices rising at a very high rate in a very short time.”¹ If you peruse the Web and economic literature, a general consensus comes to around 50%+ monthly price increases at the retail level. So, prices doubling around every 43-45 days at a minimum would be the considered outcome. Hyperinflation is essentially the destruction of a currency’s purchasing power. It quickly becomes worthless.

There are many instances of hyperinflation in history. Hungary in 1946 is the worst known case where monthly prices soared 13.6 quadrillion percent.² Prices doubled literally between sunrise and sunset. Germany’s Weimar Republic experienced perhaps the most well-known example of historical hyperinflation in 1923. Germans were using cash as fuel for fires in their homes as it was cheaper than wood.³ Zimbabwe is a more recent instance where in 2008, they printed $100 trillion notes. I bought mine on eBay for about $10 USD and it came with several other “smaller” denomination notes. You’re now reading the musings of a $100 trillionaire!

Image: German woman using paper money as fuel for fire

So how exactly does hyperinflation come about? Printing globs of money is one way. Most people intuitively understand this, but it is only one key step. Obviously, if the US government printed $100 trillion bills and put them into circulation, you wouldn’t need much else. In fact, some economists have pondered minting $1 trillion platinum coins that only have about $1100 of metal in it. The argument for that is to bypass the debt ceiling, but that’s another discussion.⁴

Hyperinflation is the endgame scenario where many bad policies compound and the outcomes spiral out of control. Rather than running a printing press and chugging out obscene denominations of fiat, you usually have political breakdowns where production falls off a cliff. The two happen concurrently. Judging by even the current toxic political environment, I don’t think we get to hyperinflation by just printing a ton of cash. We will have very high inflation and a very weak economy, but it should not amount to hyperinflation described above. There are, however, ominous signs where the United States could stumble into it.

The way the U.S. gets into hyperinflation is by doing exactly what it is doing, and succeeding in doing it. That’s the key hurdle: success in doing it. The federal government has emitted several rounds of stimulus checks already direct deposited into US taxpayers’ bank accounts.

The Rolling Stimulus: Monthly Payments Juicing the CPI

Politicians are looking to translate the rolling monthly stimulus into a permanent feature where the child tax credit becomes a refundable payment people can budget for. I question if this will happen given the current political standoff. If that’s the case, brace for a severe contraction in GDP in Q1 2022 as consumer spending collapses.

The Federal Reserve is already discussing tapering its balance sheet, but even that won’t be enough to quell the inflation.

Why the Fed’s taper won’t work

Between the consumer stimulus, the Fed’s expansion of its balance sheet, and multi-trillion budget deficits, there’s already plenty of money out there. In order to stumble into hyperinflation you need a collapse in production. That’s where things get ugly.

In the Weimar Republic, Germany was forced following World War I to pay reparations for their role in the War. In November 1922, the government defaulted on one of these payments leading to occupation by France and Belgium of the Ruhr Valley. This was a core industrial region of the German economy. The foreign occupation was to seize assets in compensation for the missed reparations payment. It resulted in “passive resistance” by the German workers where they just stopped working. Workers were made whole by the printing of money to cover the lost wages.⁵ The following year, in 1923, inflation accelerated as goods production collapsed while fiat money circulating the economy skyrocketed. The situation spiraled out of control resulting in the Weimar hyperinflation many have come to know.

This is where a parallel exists between Weimar Germany and the U.S. today. Vaccine mandate protests have sprung up across the United States. Airlines are experiencing sporadic “sickouts” where personnel are using paid time off leading to abrupt flight cancellations.

Vaccine mandates won’t fly: Air travel disruptions and the outlook for airlines

The largest public utility in the country TVA has a federal mandate to be fully vaccinated by November 22, 2021. The risk of clustered retirements and resignations/firings creates an electrical grid reliability concern if power plants are outaged due to staffing.

Vaccine mandates and risks to the electrical grid

As the broad OSHA mandate impacts private industry across the country, more disruptions are going to occur.

Vaccine mandates are extremely unpopular. Just ask the airlines. The responses are similar to the Weimar Republic during occupation: work stoppages. This will undoubtedly take place even with workforces being granted exemptions. They must undergo mandatory weekly testing to maintain employment. Weekly testing could be altered to daily testing. Imagine the impatience and frustration of millions of exempted workers forced to comply with that. Weekly proof alone may be intolerable for many after a month of doing it.

If vaccine mandates continue unabated, they will lead to work stoppages. That is the scenario for hyperinflation where production collapses in goods and services. For many products, prices may be null as they simply do not exist at any price.

There are several factors to mitigate this. The political landscape is strongly divided. Federalism and division of political power shelters states from some aspects of these mandates. The state legislatures will be in session in January across the country. The majority will be introducing creative legislation to protect their constituents to the extent possible. Many have already sued the federal government over the federal contractor mandate, which goes into effect December 8, 2021.⁶

In addition, the behemoth OSHA mandate will face immediate litigation once it drops. Many legal arguments point to how problematic OSHA’s lack of jurisdiction is. One example is OSHA regulates the workplace and not workers. Arguing workers are a grave danger to themselves in their natural state makes for an awkward legal case. The prevailing opinion is the mandate will fail scrutiny in the courts. Let’s hope that it does.

Ultimately, the scenario I see playing out is not of hyperinflation. Too many hurdles and barriers exist for these mandates to be durable. The United States will more likely experience severe stagflation, or very high inflation with a very stagnant economy. I do think undefined pricing will be commonplace. Goods will be chronically out of stock with no option to reserve a new shipment. This will continue for some time as businesses flounder and commerce stalls out.

One thing is for certain, significant political changes are imminent as the economy deteriorates. The best course of action is to stay mentally positive, remove as much uncertainty like debt out of your life, and build relationships with neighbors and family. All of that cliché especially matters now.

1. Merriam-Webster Online Dictionary. Retrieved November 2, 2021. https://www.merriam-webster.com/dictionary/hyperinflation

2. Toscano, Paul. February 14, 2011. The Worst Hyperinflation Situations of All Time. CNBC. https://www.cnbc.com/2011/02/14/The-Worst-Hyperinflation-Situations-of-All-Time.html

3. Boesler, Matthew. September 20, 2013. WEIMAR: The Truth About History’s Most Infamous Hyperinflation Horror Story. Business Insider. https://www.businessinsider.com/weimar-germany-hyperinflation-explained-2013-9

4. Stoddart, Michelle. October 7, 2021. Is minting a $1 trillion platinum coin the answer to the debt limit crisis? ABC News. https://abcnews.go.com/Politics/minting-trillion-platinum-coin-answer-debt-limit-crisis/story?id=80434078

5. BBC Edexcel. Retrieved November 1, 2021. The Weimar Republic 1918-1929. https://www.bbc.co.uk/bitesize/guides/z9y64j6/revision/5

6. Associated Press. October 29, 2021. 19 states sue Biden Administration over COVID vaccine rule. Fox 40 News. https://fox40.com/news/national-and-world-news/19-states-sue-biden-administration-over-covid-vaccine-rule/