- Twitter CEO Jack Dorsey warned on Friday that hyperinflation is coming. “It will happen in the US soon, and so the world.”
- Inflation is high, but the country is “a long way” from hyperinflation, said Cullen Roche, CEO of Discipline Funds.
- Here are three ways hyperinflation can emerge and why Dorsey’s warning is likely wrong, according to Roche.
Twitter CEO Jack Dorsey thinks a hyperinflationary crisis is right around the corner, but as bad as things are, maybe he’s seeing a civilizational collapse that the rest of us aren’t?
Dorsey sparked a new wave of inflation discourse over the weekend when he said the country was on the verge of devastatingly fast price growth. The CEO tweeted Friday night that “hyperinflation is going to change everything” and that “it will happen in the US soon, and so the world.”
The high 5% inflation seen over the last few months isn’t hyperinflation. It’s uncomfortable, for sure, but hyperinflation involves rapid destruction of a currency’s worth and the swift collapse of typical spending habits. In the most extreme cases of hyperinflation, money may not even be worth the paper it’s printed on.
And while high inflation can come and go for many reasons, hyperinflation has unique foundations. It typically occurs alongside extraordinary geopolitical events that involve existential threats to the very existence of a country, Cullen Roche, founder and CEO of Discipline Funds, wrote in a 2011 paper. Roche noted in Monday blog post that none are taking place today.
Here are the three kinds of events that have powered hyperinflation in the past, according to Roche.
Roche did not immediately respond to Insider’s request for comment.
A postwar loss of faith
Among the direst examples of hyperinflation was Germany after World War I. The country was ravaged from losing the war, and it was forced to pay war reparations and endure a change in its government imposed by the victorious Allies. For that government – the Weimar Republic – the challenge of repaying debts and rebuilding was all but impossible.
Hyperinflation began as the country grappled with its punishing loss. Consumer demand cratered. The public lost faith in the country’s currency, which drove its value lower. The government was forced to print more to cover its postwar debts, compounding the issue and further tanking the local currency’s value.
That disaster wasn’t just “a case of ‘money printing’ gone wild,” but a combination of disasters made worse by excessive printing, Roche said.
“It was the war, regime change, fragile state of mind, foreign-denominated debts, and productive collapse that resulted in the excessive ‘money printing,’ collapse in the tax system, and ultimately hyperinflation,” he added.
A countrywide shift to a foreign currency
Countries can also run the risk of hyperinflation when they cede monetary sovereignty, or give up exclusive control over their currency.
For instance, a government might take on a huge debt that’s denominated in a foreign currency, as with Weimar, which had to print vast sums of money to exchange for foreign bills, inherently decreasing its worth.
The government could also peg its currency to another country’s money. But giving up currency control “is a sure sign that the government is increasingly unstable and at the risk of a currency collapse,” Roche said.
Instances of such stifling price growth have also emerged when countries suffer complete regime change or rampant government corruption.
Regime change, while in some cases helpful in the long run, can lead to a new government being “greeted with great skepticism,” Roche said. This was seen throughout Europe after World War I, as economic uncertainty tanked currencies’ values.
Corruption or mismanagement of the economy can lead to similar uncertainty, Roche said, as currencies rely on an agreement between the government and the population that the money has worth. If the government is viewed as corrupt, “the other party is likely to want out of the agreement,” Roche said. That can lead to the currency’s downward spiral.
So to bet on hyperinflation in the US, one would have to bet on “a highly unusual and severe circumstance” that coincides with a foreign-denominated debt crisis, an economic collapse, a sudden drop in Americans’ confidence, and the “destruction of the world’s reserve currency,” Roche said.
Some ingredients for those events exist, but the US retains complete control of the dollar and faces little risk of invasion. Political uncertainties peaked during the January 6 siege of the Capitol, but tensions have eased since.
While the US has its share of problems, the kind of state collapse, economic meltdown, or crippling war losses that can spark hyperinflation aren’t them, at least until maybe the next election or two.