Coming Hyperinflation?

 Posted by on 16 October 2009 at 4:00 am  Economics
Oct 162009

Amit Ghate has blogged about this potentially ominous sign of pending hyperinflation. Here’s the relevant quote he’s excerpted from John Mauldin:

“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.

“According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed.”

To quote a cultural icon, “Ruh Roh“.

As Amit notes, this is just one numerical indicator, although an eye-opening one.

And hyperinflation is just one possible scenario. But prudent investors may wish to hedge their bets and take appropriate measures.

I’m not an economist and this should not be construed as any kind of investment advice or endorsement. But Instapundit has mentioned two books on this topic:

The Hyperinflation Survival Guide: Strategies for American Businesses

The Modern Survival Manual: Surviving the Economic Collapse

The second book was written by “Ferfal“, the Argentinian who survived his country’s hyperinflation during the 1980s and posted a now-classic online essay about his experience and how others can cope under similar circumstances.

Other bloggers have made specific recommendations for asset protection, for instance here and here.

Again, I’m not necessarily endorsing any specific investment advice here nor predicting the worst-case alarmist view. But if history is any guide, these scenarios are not outside the realm of possibility, even for the US.

Whether any of this happens will depend on decisions that still remain to be made by our politicians, as well as the responses of private citizens in the US and abroad, all of whom have free will.

Hence, my own (admittedly vague) prediction is that lots of “interesting” stuff will happen to the US (and global) economy over the next several years, but the exact nature is yet to be determined. So all anyone can do is buckle up and get ready!

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