To be clear, UBS does not think hyperinflation is imminent. They estimate that there is less than a 10 per cent chance over the next 12 months.
But according to a new report by UBS’s Caesar Lack, the risk of hyperinflation is greatest in the U.S. and the U.K.
“Although we see a very small chance of hyperinflation in the near future, the risk should not be neglected, particularly given the ongoing unsustainable global fiscal and monetary expansion,” writes Lack.
UBS examines it at length in the latest entry in their “Global Risk Watch” series.
Here are the points from Lack’s paper:
- Hyperinflation is a fiscal phenomenon, resulting from unsustainable deficits. Historically, it occurs after central banks monetise a large amount of debt.
- It’s actually more closely related to deflation than inflation “as hyperinflation can be viewed as the result of a failed attempt at printing money to avoid the deflation that would be caused by austerity.”
- Currently, it is a concern for the some major currencies because their path is exactly like that described above; large fiscal deficits have forced austerity and deleveraging, and countries are responding with large scale monetary easing.
- The warning signs are here for several economies. UBS research finds that hyperinflation tends to happen when deficits financing more than 20 per cent of government expenditure. India, the US, Japan, Spain and the UK all qualify.
- The Eurozone as a whole is below that threshold, Japan is a creditor nation, and India’s currency is not hugely vital to markets.
- “We therefore think that the hyperinflation risk to global investors is largest in the US and the UK.”
“A significant deterioration of the fiscal situation or a significant expansion of the monetary policy stance in the large-deficit countries could lead us to increase the probability we assign to the risk of hyperinflation,” writes Lack.