Face-Peeling Hyperinflation

The weekly Barron’s magazine is the one financial publication I read religiously.  For each issue, I even electronically copy important statements and past them into a Word document.  I then edit them down to about half of their original length so I can quickly review them later.  The statements are the views of individual columnists who are often quoting other economists, but I take out the attributions.  All I want to capture are the ideas.  I figure if staid, conservative, old Barron’s thinks the ideas are important enough to publish, I should listen.   Here is what I have from last week’s edition:

There will be global hyperinflation that peels the skin off your face.

Central bankers will start printing money to pay off public debts and keep the banking system solvent. Expect a managed global devaluation of all major currencies in six months to a year. It could be orchestrated through the IMF, or the markets might require a gold-based solution applied by the central banks.

The system’s base money (bank reserves and currency in circulation) is dwarfed by the claims on it. For every dollar of base money, there are $5 worth of bank deposits. So, if everyone demanded the return of their deposits simultaneously, the bank could pay only about 20 cents on every dollar.  Banks bet on the fact that everyone isn’t going to come calling for their dollars all at once, but the system is at a tipping point. Leverage has grown exceedingly large and banks have used the funds from deposits to make questionable loans.

The bad debt could be restructured so that creditors get cents on the dollar but it would cause too much pain. The more likely outcome is that the central bankers print more base currency, reducing the buying power of the money already in circulation.  And voila!  You have skin-peeling inflation.

The losers in this scenario: holders of cash and “risk-free” Treasuries. Of course, cash and Treasuries are just what risk-adverse investors favor right now.

Okay, this scenario is probably a bit over-the-top, but add in the willingness of governments to spend on growing social needs and automatic cost-of -living increases.  Then add in the growing interest payments on sovereign debt.  Together, they could easily trigger a death-spiral of ever-increasing inflation.  What other scenario is possible?

Baron’s presents different views, and even in the same issue I could probably find contrary, less-colorful, predictions of world-wide deflation.  I tend to pick out what supports my own opinions, but I also select possibilities I need to remember.  Even a small possibility of hyperinflation requires prudence.


About Roger Walck

My reasons for writing this blog are spelled out in the posting of 10/1/2012, Montaigne's Essays. They are probably not what you think.
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