How Hyperinflation Will Eventually Happen

Hyperinflationistas talk a big game, but none of them as of yet have been able to tell me how exactly we will reach hyperinflation.  Dissatisfied with my lack of understanding, I thought about it myself and came up with the following explanation. But first, we know what is hyperinflation, but what isn’t hyperinflation?

Hyperinflation is Zimbabwe, hyperinflation is the Weimar Republic—but when does normal inflation become hyperinflation?  With no research to cite, I’ll pick a number—10%.  Hyperinflation is when there is a precipitous drop in the value of a currency, or an enduring period (10 plus years) with inflation greater than 10% per year.  So now that we “agree” that hyperinflation is coming and we know what it is, let’s talk how it will eventually happen.

Many Austrian Economists and hyperinflationistas like to cite the M3 money supply for the basis of their analysis.  But to be conservative, I will cite the M2 (substitute the M3 if you don’t like it.)  Further, I will cite the CPI.  If inflation in the money supply is inflation, which, with the accompanying chart it blatantly is not, then via the M2, we should have had cumulative inflation of 29,836% since January 1st 1959, or a compounded year over year, 106.74% inflation every year since January 1st 1959.  It’s untenable; we haven’t had that much inflation!  So it begs the question, if hyperinflation is coming, and we haven’t had it yet, then where did the inflation go?

M2 vs. CPI

Since 1959, currently unrealized inflation has gone into interest-bearing assets, assets like stocks, bonds, and real estate.  And “each” year, those assets have been swapped between owners in the economy because, on average, the collective value of those assets increased (think of it like a money making machine—put money in, and more money comes out .)  Where did the inflation go?  The inflation went into these interest bearing assets.

Hyperinflation will eventually happen because there will eventually come a time/event when no one, domestic or international, will want to buy our interest bearing assets, and all that inflation that the M2 mopped up will be released.  It is hard to believe that your house decreasing in value is a form of inflation, but you are losing purchasing power, no?

It would be foolish to put a time line on this, and no matter what the economic/government policy a country has, it wouldn’t even matter because “in the long run everyone is dead.”  (Sorry Austrian Economists, your school can’t protect us from a meteor.)  So instead I’m going to predict what happens next.

As Joe correctly predicts (I think), 10-year Treasury interest rates will be lower when QE II ends.  In that cycle (I predict) that you will see both the dollar and gold rally because “flight to safety” is being decoupled from the dollar because hyperinflation will eventually happen.

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