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There are a lot of Chicken Littles running around these days warning us all of the coming hyperinflation.  They range from vile fear mongers like Glenn Beck, to radio host sell-outs that are peddling gold, to idiotic wall street "analysts" who actually believe their own bullshit.  The basis for their fear is based on government deficit spending.  The fact that they think that deficit spending in the wake of a financial and unemployment crises is going to somehow lead to hyperinflation shows a stunning amount of ignorance on the topic.

There are so many angles of stupid when it comes to worrying about hyperinflation at a time like this that it can't possibly fit into one diary.  Instead, I'm going to concentrate on the most important and most common aspects.  That way when your right-wing friends, family members, or co-workers bring up the topic, you can be ready to demolish them using pure logic.

Hyperinflation is not a monetary event.
The first and most important concept to understand is that hyperinflation isn't just inflation "big time".  It's understandable that most people think this since both lead to higher prices and wages.  However, that is where the similarities start and end.  Likening the two is like comparing your car to a NASA rocket.  They share the similarity in that they both get you from point A to point B using an endothermic reaction, but that is where the useful comparisons stop.  Where inflation is a monetary event of more money chasing fewer goods, hyperinflation is a rejection of the currency.  Inflation is mostly a monetary and fiscal event, hyperinflation is more of a psychological event.  Inflation occurs when the amount of goods in the economy cannot keep pace with the amount of money in the economy.  Hyperinflation occurs when people no longer wish to accumulate or save a currency.  When people reject a currency, they try to get rid of it as soon as possible.  This increases the velocity of money which contributes to rising prices.

Inflation and government deficits do not, by themselves, lead to Hyperinflation
This is probably the scariest claim made by hyperinflation hyperventilators.  It is also wrong.  While federal spending can lead to inflation, deficit spending alone cannot cause hyperinflation.  The increasing amount of money necessary to lead to hyperinflation would have to double whatever the gdp is to get to the point where we have 100% inflation or more.  The reason that is so difficult is because not only would the government have to spend the equivalent of the previous year's gdp, it would also have to spend even more to maintain the same level of deficit spending, because it would start getting some of the money it spends back in the form of tax revenue.  Further, if deficit spending by itself caused hyperinflation, then cutting off spending - by itself - would stop it.  If the government spent 20$ trillion in one year(most of it deficit spent), and then spent the same amount the next year, the inflation rate would go down because the increase in tax revenue would mean less of it was deficit spent.

Hyperinflation follows a non-monetary event
Hyperinflation always follows some external event.  The external event can be war, famine, ecological disaster, a loss of faith in government, or some other external event that destroys an economy.

In the case of Weimer Germany(hyperventilators goto scary scenario) wasn't just caused by external debts.  Germany did inflate its currency to try and pay off its debt, but that alone didn't cause the extended hyperinflation. In fact, after Germany made it's first payment, it's inflation rate started going down.  What did cause it's prolongment was when England started stealing Germany's exports, and France & Belgium occupied the Rhur.  The Rhur contained 80% of germany's productive capacity.  The German government, started paying it's citizens to not work rather than cooperate.  Well, when you suddenly lose 80% of your production, you no longer can provide for yourself, and when your exports are stolen you have no way of trading for what you need.  The result is either starvation or hyperinflation.

Speaking of starvation, that brings us to the latest hyperinflation scare example: Zimbabwe.  Zimbabwe had a corrupt government.  The corrupt government threw all the farmer's off their farms and gave it to it's cronies.  Unfortunately, those cronies didn't know how to farm very well.  That led to massive drop in farm output.  Since food was such an important part of Zimbabwe's economy, the government had to make a choice.  Mass starvation, or inflate the currency.  As corrupt as it was, they chose to hyperinflate it's currency so that it could import food for its citizens.

In both these cases, the hyperinflation followed a massive disruption of the countries' economies.  You will often find this in other, lesser-known, examples of hyperinflation.  In other cases, you'll find that hyperinflation followed when people no longer believed the government issuing the currency would exist(a loss of faith in the government).  Poland between WW1 and WW2 is an example of this.  The last known cause of hyperinflation is when a government becomes incapable of collecting taxes.  The confederacy during the civil war.  The confederacy had trouble collecting taxes.  They were both unwilling to levy heavy taxes and unable to collect the taxes it did levy.  Often people would avoid tax collectors and the confederacy couldn't devote the resources to chase them down.  Therefore, the confederates found themselves creating money that no one wanted - or needed.  Near the end of the war, they had the same problem as Poland.  The people lost faith in the government.

Hyperinflation is not coming to America
*America has not lost it's productive capacity - in fact it's increasing.
*America can still collect taxes
*Neither Americans nor Foreigners are rejecting the currency
I will be writing a longer post on this topic.  I'll go further in depth in how I know each of these is true, and how its evidence against hyperinflation occurring.

Much of this analysis is based on Modern Monetary Theory (MMT). It's a (relatively) new "Post-Keynesian" economic school of thought.  If you're interested in learning more, please follow our group, Money and Public Purpose.  Also, there is a small, but growing MMT wiki that is worth checking out.

Originally posted to Money and Public Purpose on Tue Jun 07, 2011 at 06:30 AM PDT.

Also republished by Community Spotlight.

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