Hyperinflation – Cheer up world, it may never happen
I should make it clear at the outset of this article that I’m not an economist. But, like many people who begin their speeches with those words, I won’t let it affect what I have to say.
I have made it clear in the past that I take a sanguine view of the possibility of inflation, since the massive deflation across all asset classes (stocks, real estate, many debt instruments and some commodities), amounting to tens of trillions of dollars, in my view massively outweighs even the cutting of interest rates to nothing and the large deficits anticipated over the next ten years. However, there is an equally convincing reason to think that hyperinflation will not be a problem: Because everyone thinks it will.
As I mentioned in my article about the New York Times indicator, whenever a particular stock market or macroeconomic view is popular enough that a book about it makes the best seller list, it’s time to get out. And what did I see in an article in Fortune.com early last week? An article about how hyperinflation won’t die, and the words “Adam Fergusson’s When Money Dies: the Nightmare of the Weimar Collapse was recently offered at $1,705.63. A rushed paperback UK edition of Fergusson’s book has held onto the number one spot for business books on Amazon UK for more than twenty-six days and is now climbing Amazon’s US rankings.” I think that’s a good enough hit for the New York Times indicator.
Just ask Hugh Hendry, a macroeconomic hedge fund manager with a dreamy accent and an enormous brain. He reports that he has never seen such a crowded trade as the absolute certainty of hyperinflation. In my view, the fact that a trade is so crowded is reason enough to consider not just declining to jump aboard the bandwagon, but actually taking the other side of it. And there is nothing so dangerous as absolute certainty. Hendry himself is actually willing to hold the long term government bonds.
Of course, in that same interview, Hendry said that quantitative easing has a mixed record in history and he is definitely afraid of deflation, since despite the willingness of the US government to ease and to engage in deficit spending, the private sector is still not playing ball. The trouble is that in a normal environment, it pays to take risks that no one else is willing to take, but in a deflationary environment this is often not the case. It doesn’t pay to stick your neck out by investing and expanding capital and payrolls; it pays to go into turtle mode and stock up on government bonds and cash. Now, I have seen a recent uptick of articles about deflation, but no books. Furthermore, I can see the case for deflation a lot better than for hyperinflation.
As hyperinflation is contraindicated by the New York Times indicator and the numbers involved, it is pretty clear that deflation is the real risk we’re facing, and it is a pretty severe risk for any economy but especially a highly leveraged one like ours (did I mention that I like companies that are paying their debts down while they can?). As I said, I have seen a spate of deflation articles recently, but nothing I would call a crowded trade, apart from the continued bull market in US government bonds despite the unusually low interest rates. But deflation certainly worries me more than the remote possibility of excessive inflation. So maybe “cheer up” isn’t really the right sentiment.
I hope that the hyperinflation fearmongers and the gold people (who are also selling books and articles and gold coins over the radio) realize that the steps we have taken so far are not enough to create hyperinflation or possibly not even enough to prevent deflation, and that the stimulus and easing we have had so far was in fact not a bad idea, but instead just too small of an idea. Ireland embraced austerity early; it was one of the first countries in Europe to do so, and it remains mired in the same recessionary spiral as Greece is and the rest of Europe may not be able to avoid. China embraced a massive stimulus and is growing right now, assuming that China’s reported figures are credible. Commentators have said that we need to get the fiscal house in order before we get hit by the next cyclical recession and consequent erosion in the tax base, but I say that we actually can’t even begin the next cycle until we’re done with this one, and right now it doesn’t look like we’re even close.
Let me paint you a worst-case scenario (well, not the worst-case, but a pretty bad case, anyway). The US is right now treading a middle ground, with no deficit cutting but no further large-scale stimulus packages in the works (extending unemployment benefits props up demand, but can’t really create it). I hope it doesn’t require Europe to blow up from austerity before the US decides that avoiding deflation is worth what it costs. But if it does, we can always print a ton of money and buy the remnants of Europe’s capital assets with it.
I’m sure that’s what China would do.
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