Topic: Causes of hyperinflation (Read 7253 times)

Just checked this thread after a while, just wanted to say thank you for the informative posts, especially interesting is the discussion on inflation as a tool for renegotiating debt.

Hyperinflation is caused when a country borrows too much of it's currency and/or sets it's interest rate much lower then the market would support and/or make it very easy to get out of debt obligations.

Financial savings are always debt on the other side of the balance sheet.
The thing that matters is who is the issuer of the debt. When debt is issued inside the private sector (by lending, e.g.) the net private savings don't increase.
When the debt is issued by government to the private sector, the private sector's savings increase accordingly.
Government debt is an asset to the private sector. Government issues debt when there's a propensity to net save in the private sector.

Indeed, fiat attempts of the past have all failed (most with hyper-inflation), many modern ones have, are, or will.

Well hyperinflation is something when there is a lot of money that gets into the circulation suddenly. As we saw in the case of germany, when the germans started printing notes to battle the wall street crash they had an hyperinflation and the people had to load money in suitcases to buy a loaf of bread.

Ha ha.

I have, in fact, but it appeared he did not know anything about money or debt.

Who told you those fairytales? Debt was on top of any kind of money from the very beginning. The first debt was the tribute (tax) to the masters and rulers. This started the economy and all kind of money. Untaxed, ungoverned people who live beyond the state didn't know tribute, tax and debt, and therefore they didn't need the derivative of the tax, which is money. They are self-sufficient.

Read Graeber:

http://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

and Paul C. Martin:
http://cdn.preterhuman.net/texts/wars_and_weapons/us_weapon_export_guide/Machttheorie-Martin-Symp.pdf

Thought the decline of UK was smooth and they didn't suffer the same kind of pain US is having right now.

If history is any guide, exchange control and rationing will happen not too distance in the future for US.

Anyone over 50 from the UK can tell you they cut the electric in the seventies.  It was only there for business to continue really so evenings would be lights out, Uk was very poor after WW2 ended and rationing continued for about a decade

Interesting.

Do you have a source on this?

And a more comprehensive history would be nice also.

You really have to set your imagination free, and start to question what you are served by the masters.

There really is money, which is bills and coins. These work just like bitcoins. Then there is debt. Debt hast two parties, is set to be paid back at some point in the future, and normally the debitor has to pay interest. Debt extends the money, and reduces the value of the money unit.

Any debt works like that, even the casual loan of a few dollars you give to a friend.

Although debt is a nice function that can increase freedom, debt is not necessary for the world economy     to function. Without debt, the money would just have higher value. Any venture any size could still be done, you just need to summon more people to take part in your project.

Problems begin when, instead of planting it in the spring, he continues "saving" it.

But stop thinking of money in terms of grain--it isn't.
A more fitting analogy would be bread.  You "save" it, and soon you have a warehouse full of mice and moldy bread

The Japanese are saving money, which ist debt: 500 percent of GDP.

30% interest rates and only electricity on 3 days of the week suggest problems in that transition.  Maybe not hyper but sterling lost far more then dollar in last hundred years

You mean at the end of world war 2? The Bretton Woods agreement?

You mean when the dollar was gold backed and countrys sent their gold to fort knox in exchange for dollars?

Is this what you ment?

When the world agreed to use the dollar, backed by gold, to stabilise international trade post war?

British didn't suffer hyperinflation when the world abandoned the pound and switch to dollar.

Well done you've completed your transition to join the darkside become treasury secretary


Is a farmer saving a crop for the winter a poorer man for it.  He could just sell it at market but instead he saves it.    Is he in debt, no he just saved production.  That is the origin of savings, our modern muddle of traded debt as money with more debt to pay the interest makes it all a joke.  
  In that case maybe you are correct, savings just represent a greater obligation for payment.  With nothing to back the dollar absolutely, savings just become a negative but in that case you should be saving something of worth not denying the whole idea of saved production


http://www.youtube.com/watch?v=16ywzJ3U7rg

Many believe that the collapse of government fiat ponzi scams can be accelerated by off ledger (unbanked)savings. This can be non-fiat denominated assets or even physical currency notes. This is also what would be expected to sustain in an economic collapse.

I don't pretend to know what's going on in the mind of the average Japanese peasant, but they're a smart and proud people. I don't find the notion that they've lost faith in their currency and/or government to be all that far fetched. Perhaps like awake Americans they don't know exactly what to do to bring down the machinery of oppression and they're just compartmentalizing.

Savings? Funny. That's DEBT on the other side of the balance sheet! The more savings in the world - the more debt.

Whats backing the debt, the issuing of more currency in many cases.   Thats an unfortunate circular relationship and what supports tax revenues, 50% of gdp is government who are in a deficit in any case.  Another problem waiting.     The big deal is you cant readily exchange your currency at the highest tiers, where governments hold trillions they have a real problem of gaining its value without upsetting their ongoing trade not with USA so much but the world which relys on dollars still



Thats from Keynes and even he didnt agree with USA as the sole regulator of world reserve currency.   The current scenario proves him right in that respect yet he is used to justify many modern practices


Savings are used, not many people are holding raw notes in any quantity.   If the money is with a bank then its a security used for their activities, even if its simply reloaning the cash at a higher rate this is a form of investment.   If a country does not spend its cash immediately, it is likely used in business.   Its probably no coincidence Japan has such large investment overseas.
       Since government can now just create money without saving, many believe it pointless to do anything else; a sharp readjustment will be a nasty wakeup probably not hyperinflation but maybe

lack of trust too. If you believe prices will rise, you consume as fast as you can and do no savings, so putting more pressre on price.

If people abroad dont trust your coin, they wont buy it and this will make more coins avaliable, therefore putting pressure on prices

That's true, but it's not that simple. Some cite comparatively low social protection as a reason for elevated savings rate. Some cite mentality. Some cite indecisive government.
By the way I don't think that consumerism can magically solve their problems.

Don't some people say that their obsessive savings holds back their economy?

Don't know about an equation but I would say hyperinflation is the inevitable result of renting our money from a central bank and I would considered it to be the result of compounded interest on rented money.

the graph shown earlier is clearly y(t) = a^f(t) or similar. Comparison of previous data to a current model that fits the plot on the graph would give you a good enough equation.

G.

That's why bitcoins are awesome , no government can control it.

You mistakenly included Japan into this list. While I agree that US and Europe private sectors can hardly expand debt currently, for Japan the situation is different. Japanese are unwilling to borrow, not unable. In fact, they have enormous savings stash compared to the rest of the world.

The currency is backed by debt, and debt isn't inflating as fast as before. That's the reason why we are far away from inflation.
Over-indebted economies (Japan, Europe, US) can hardly expand debt/credit anymore; therefore we don't see infation in those economies.

Depends what you call default, when they raise the retirement age for pensions its a form of default.   You are not getting back the expected returns but you will get them at some point, so its arguable I guess.
I'd argue Zimbabwe defaulted but perhaps others would say not but they fulfilled their promise in name only.

Gold has a risk to it in some ways, Im no fan especially but in my judgement its less then the political risk return at present hence I expect it to rise in comparison.  

http://en.wikipedia.org/wiki/Good_faith

That's the reason I wrote credit risk, not just risk. Credit risk is a risk of a bond not being paid when due. The only thing that leaves room for default is possible inability of congress to raise debt ceiling. There are other risks, like interest rates risk, dollar devaluation risk, etc.

I dont accept zero risk.   This is like those TV adverts, with a lifetime guarantee.  You will never need to worry (or think) again.   There is not a no zero risk option, this is what we want life to be but there is risk.  Dollars definitely are risky, the question is are they safer then alternative stores of value.
There is demand for dollars, immense demand by billions of people or at least the governments representing them.  There are not even half a billion in USA so the weight of numbers supports the idea of an infallible dollars however I believe it can fail or at the least degrade badly and become volatile.  Something the FED has always sworn they are established to never allow again.

Ben B is on record saying T bills are not money, they are an asset



This is political double speak.  They are increasing the QE every day however they are decreasing the amounts its going up by.  Its still going up and Im still waiting for them to stop nevermind reverse, some 6 years after they started this bailout train

Or people losing faith in the banknotes already printed.
Hyperinflation is a runaway condition, seldom intentional.  The evol bankers don't want it to happen any more than the people holding the notes

Because the government debt is a form of money (especially zero-coupon notes). This is a consequence of its virtually zero credit risk nature. It's widely used as collateral in many markets, and more importantly in monetary operations with Fed. This creates a lot of liquidity.

They already started to taper QE.  QE by itself was not enough to stimulate the economy, but what it did was try to relieve liquidity issues via The Fed buying MBS from the banks.

The problem is The Fed can only have tools of monetary policy, they can't force the banks to lend it out.  Especially when private sector is paying down balance sheets cause they think a economic downturn is coming.

The thing that hasn't happened yet is a big stimulus action like Roosevelt's New Deal. Perhaps that will come next

Its ironic that natural action is not as destruction as deliberate acts by government.   Done in the hope of good effect they have unintended consequences, its practically a second law of government that everything they do has a secondary unseen unplanned effect.

I'd argue alot of the negatives in the 30's were not from stock prices falling but acts of government like the Smoot-Hawley Tariff which meant to increase USA business by cutting off foreign trade.   It ignored comparative advantage and obviously basic freedoms of a citizen to choose where to place their business best and at the best prices



You'd need to say how.   Debt is a promise of dollars in the future.    We have produced alot of debt, do you mean this cannot be that alot of dollars will come into existance.

I know QE in theory is supposed to reverse, Im going on their actions far more.  In the last six years they have instigated more then a few QE campaigns and right now are still continuing the 2008 recession actions.   Its just possible sometime this year they do stop increasing QE.   I will be surprised if they ever manage to reverse it though.   So all those new dollars I count as inflation


When its said bitcoin is going to 10,000 then this is it.  It can do it today because most of the damage is here now, its not apparent but its present

Yes, lets do nothing and allow things to take their natural course, like in 1929 and end up like in 1932.

it's not that easy to explain.need some long words.

"Humble" Ben Bernanke explains that he prints trillions out of thin air and causes hyperinflation with great "humility" some say.

But for me these words from The Daily Bell make more sense: "There is nothing humble about what Bernanke is doing or has done. He's playing around with the lives and savings of billions. It's impossible for a handful of good, gray men to manage a global economy of tens of trillions. It cannot be done. It is arrogant to try, and it seems to us even more arrogant to speak of humbleness while doing so."

If you speak of government debt, you are wrong.

Hyper is over 30% inflation per month I believe so there is only one real cause, excessive production of irrefutable bank notes.   At present USA or Japan or UK have hyper inflated bond prices, which means just as much that debt could deflate to zero worth and the currency would still retain its value.     With the FED holding gov debt as an asset backing dollar, it would lose value also but Im not sure that is hyper or if a overnight 50% loss and a one time revaluing doesnt count


Not the derivatives because that is a private contract and just as much can be lost as made.  Usually it spikes then drops terribly, not nice to experience but ultimately the inflation value is lost and the net effect is just volatility not monetary expansion
The problem is the dollar notes because they cannot be refused without causing a failure of them all.   Separate issued bonds have terms that be renegotiated, a haircut or whatever.  Its a product which can fail where as the notes are the bottom line.   AIG screwing up whatever is not a cause of hyper inflation.  Maybe expansion and maybe a horrible mess, default and basically the effect deflation.  Only when gov refuses to allow the failure, then its a problem as they are likely issuing dollars and then its hyper inflation


If Im wrong, feel free to say how.  Most people take gov debt under too much influence, all that debt the trillions of it is promising dollars (in cash if demanded ?) so I cant see why you could look anywhere else for excessive dollar production

Banks don't need spare money to lend. All they need is collateral in case they need to comply with reserve requirements, with treasuries being perfect collateral.

Thus virtually all money Fed created is locked as excess reserves at Fed. It barely helped, banks didn't want to lend out like crazy again.
That's why monetary policy is ineffective economically while fiscal policy is much more powerful. Because gov't can decide where money goes while Fed cannot.

Freeing some banking money stocked on bonds in order to incentive banks to lend more to "the real economy", corporations, consumers, etc., and thus promote aggregate demand. I think Bernanke did a remarkable job (I'm not american, my opinion has nothing to do with politics).

That's probably true for QE1 when Fed removed a lot of toxic MBS from banks balance sheets.

But what's the point of the next two rounds which mainly involved buying treasuries?

Without the QE, there would be a crunch on the M3 and, probably, open deflation and a real depression.

That's true.
Then what do you think is the point of QE?

Well unless the war is a tiny war then the US has a bunch of those going now and then with ROI every few decades

A huge cause is continuing to print more and more money (that is backed only by promises), to finance war after war

Op you seem in the right track.
The relevance of the velocity of money on inflation has divided schools of economics: neo-Keynesians say it's relevant because changes a lot, neo-classics say it's stable, therefore of little importance.
The main aspects are the volume of M1 and M3. The increase of M1 isn't enough, as the recent explosion of the M1 on the USA shows, if the banking multiplier works badly. Because the increase of M1 didn't end up on an increase of M3: banks limited the banking money supply by limiting credit.

Banks can decide the money flow. For example, currently majority of the QE money is sitting at FED doing nothing, that is the reason we are not seeing any significant inflation even FED has increased base money supply by 4 fold since 2008

In another word, if I'm central bank, I will make sure there will be no inflation by limiting those money so that they don't enter circulation. Or, at least do not enter the market that will affect the CPI (I will let money flow into housing market to support the house price, but will not let them flow into supermarket to drive up the milk price since latter is in CPI)

And even if they enter circulation, there is Cantillon effect: Those who first get the new money will enjoy its full purchasing power while those who last receive the new money will take the loss through inflation. This usually takes a long business cycle

So banks really have lots of tools to deal with hyperinflation, since majority of the money are in bank's hand, they will control it very well. But if there is a competing currency, they will lose their control, people can use alternative currency instead of their currency, thus the demand for their money is no longer unique, that might cause hyperinflation

True enough, part of the blame is that they don't really teach children the importance of finance from a young age just some abstract algebra lol.

The problem is the average person can't balance a checkbook, let alone understand the economy

What you are seeing in the chart is the first reaction of common people to inflation (prices increase).
They see prices increase and reduce spending because they think the prices increase is an anomaly and not normal . So they act like people using bitcoin do when bitcoin exchange rate go down: they reduce spending and increase saving. They consider the supply of money inelastic.
The same happen when people have too much debt and they are forced to save more and spend less to be able to pay back the debt.

Hyperinflation happen when people start believing the prices increases will never stop in the foreseeable future. Then, instead of saving money they try to get rid of money.
Like people stopping to save and increasing consumption because there is no point to save to pay back a debt, if they believe the debt can not be paid back anyway.

Money in circulation, as well as money velocity are dependent on economic activity, with money velocity a lot more responsive to changes in economy.
Just look at how central banks try to pump money into economy with little to no success, and how money velocity is tumbling. That's because they have no power over economic activity, instead the economy should be stimulated by government. But then we have those silly republicans trying to cut the deficit

Yes, he's basically transferring those risks from the banking system onto Fed hoping that it will increase lending. But lending does depend on presence of creditworthy borrowers rather than on banks balance sheets.
And overall this ZIRP only results in misallocation of capital and bubbles.

It is hard to say when.

To bring this back to bitcoin, I think we have seen it go from $10 to $1000 because it is a very effective and public absorbent of central banker's inflation.

QE isn't working because Central Bankers can't force banks to lend that money to the private sector. But you already said that in your post.

I think the main reason for QE how Bernanke is doing it.  He's buying MBSs.  He's doing this because banks can't unwind these toxic assets.  He's trying to un trap liquidity but the banks just use the money to trade instead of lending to the private sector.  If they aren't allowed to prop trade, then perhaps they would lend out the money.  The other problem is private sector isn't really borrowing because they don't see a recovery. 

having a currency backed by nothing, over printing the currency and unregulated derivative banking policies.

I think the amount of money in circulation is the foundation of money velocity: If money is scarce it is more likely to be hoarded (deflation), because it will not loose value, if there is an oversupply it is more likely to be spend fast (inflation), because it might be less valuable in future. There may be other factors that influence velocity, but I think these are rather temporary.

Do you really think the amount of money is the only thing that matters?
Why does everyone forget about money velocity? These two parameters don't really have any economic sense regarding price inflation without each other.

The main principle of modern monetary policy is that economic activity can't be controlled directly. Central banks try to influence it indirectly instead through changing 'the cost of money'.
That may or may not be the best approach, but it seems to work well if done properly.

But considering senseless QEs it really looks like that central bankers don't have an idea about how their own monetary mechanism works.

  I have been looking for an up to date chart of US money supply- I think this is the most accurate one I have found. I guess M2 and M3 include the money created by banks- or do they? It seems the more I learn about this subject, the less I understand.

Possible solutions:
1) The amount of money in circulation is decreased, never increased or only increased at a very low rate (valid under the assumption that the economy does not shrink).
2) The amount of money increases and decreases exactly in sync with the value of all newly produced or devalued economic goods and services.

(1) is the case of Bitcoin, (2) is the hypothetical ideal of  the current central bank model (which is not implemented and may be impossible to implement in reality).

Tax added on the minting of coins.
Money supply increases, government spending rises, an increase in consumer confidence, rise in value of commodities leading to hyperinflation after negative growth.

Why? How can we make sure that money is not over-supplied?
Care to elaborate? By which means?

Remember street fighter 2 and then street fighter 2 hyper fighting. Similar causes. People wanted more of a challenge  with their economy.

Central bank seigniorage.

   I understand that the loss of confidence can cause hyperinflation- I guess my main question is what is the role of the velocity of money in this process? Somehow I think this is key to determining why the inflation rate remains low.


Can low money velocity result in deflation which counterbalances inflation?

This. Instead of "political phenomenon", I would more generally say "psychological phenomenon".

Oversupply of money is the necessary precondition (which is also the definition of the term "inflation" which I prefer), but it's the psychological expectation that money will loose value in future that accelerates it's loss in purchasing power. This effect is self-reinforcing: The expectation of deprecation in purchasing power stimulates spending behavior, increased spending yields price increases for goods and services, which validate the expectation and reinforce the expectation of further currency deprecation, encouraging spending behavior even further...

You can buy trillion dollar notes from zimbabwe on ebay for a few dollars. That should give you an indication of what causes hyperinflation.

It is caused by excessive money printing and nothing else.

As has been said already on here at least a few times, hyperinflation is a loss of confidence in the currency by the people as a whole using it. Predicting when it will happen is like predicting when American Idol will be taken off the air. The show probably should have been shut down already but still it keeps holding on. Maybe people still watch it because nothing better has taken its place.

The USD is the same way. All signs point to a dollar so weakened it probably should have collapsed already and yet it still keeps holding on. Maybe the people still keep using it because nothing better has taken its place. Yet.

It's also very possible that hyperinflation has already begun but we haven't felt it enough to call it that yet.

What will cause a modern fiat currency like USD to fail and hyper-inflate?

Yup.


I would say a larger country will definitely make for a longer lifetime of a fiat/fractional system.

But still; fiat/fractional systems have and always will fail, that is unless users can colonize the universe at an ever growing rate.

Hyperinflation is caused by loss of confidence in a particular currency by the majority of economic agents.
It results in an abrupt increase of money velocity and a subsequent shortage of a broad range of goods which fuels further price increases.
Basically it's just dumping money against anything that can preserve value (or at least not lose it that fast).

Hyperinflation is more likely to occur in an underdeveloped economy. Hyperinflation in a country like USA is highly unlikely and can possibly be caused by major catastrophe.

Fractional reserve fiat system seems almost designed to leave the bag-holders crying.

The current money system is really quite a devious scheme, if you can grab an hour to watch this I recommend:

https://www.youtube.com/watch?v=jqvKjsIxT_8

Hyperinflation is concept completely different from inflation.
Inflation is about the increase of the supply of money.

Hyperinflation is a political phenomenon.
It happen when people holding the money stop believing inflation is a transitory phenomenon and start believing it is a continuous policy of the government.
From that moment, it do not really matter how much the supply of money increase, people will try to get rid of money ASAP buying anything.

Under normal circumstances (low/no inflation) people see the price of a good and say "I buy it now, maybe it could be useful in the future"
When inflation raise the prices, people will say "I will wait and I will buy when it will be needed/useful"
Later, when inflation increase they will say "Bettet to buy it now, before price rise again"
In hyperinflation they will say "It is not useful but I will buy it anyway because the money I hold will lose purchasing power tomorrow"

  Thanks for the replies. I recently read that inflation used to be defined as expansion of the money supply- 10% increase equals a 10% increase in prices.

    After watching some more videos and considering it, I think it is important to distinguish the monetary base and the money supply.

http://azizonomics.com/2013/04/25/even-after-all-the-qe-the-money-supply-is-still-shrunken/

Hyperinflation is caused by drastically increasing the amount of money currently circulating in the economy through money printing, this was nearly impossible to do with a currency that was made from Gold or Silver because if you did things like mixing in copper with the metals people would notice it immediately and the currency would lose its value and therefore make prices rise because in order to buy things you would have to get more of the currency that has been hyperinflated.

People often wrongly confuse price velocity with hyperinflation/inflation as blatantly shown in this thread, while it can be an indicator the real thing to look at is how much money is currently circulating in an economy, this is why it costs so much just to buy one Bitcoin and why it costs even more to buy Gold. Currencies that have a limited supply are simply honestly reflecting how much currency is being pumped into the dollar for example which is being printed by the billions.

If we knew everything about the amount of volume going into the dollar and so on, yes we could potentially track it, but because the Federal Reserve is so secretive about its dealings and how much it prints we may never know until there's finally a crash or a depression.

https://www.youtube.com/watch?v=iFDe5kUUyT0 - This series of videos also explains tons of stuff like how the bond markets work etc.

Everyday, people trade dollars for goods and services, and even other currencies. Don't think of it as "spending", think of it as trading. They do so because they have faith that the dollars they are receiving are or are going to be worth tomorrow roughly what they have traded for them today. No one cares what you "want" your dollars to be worth. All that matters is what the person (or business)you're trading them to thinks they're worth.

Think about Mt. Gox for a minute where people traded various currencies for Bitcoin. As long as people believed that Mt. Gox was going to be there tomorrow then people willfully traded there. Eventually, people were unable to trade there and, even though their account balances said they had X number of bitcoins, they were unable to trade them and others believed those bitcoins had lost all value. This was not all bitcoins, just Mt. Gox bitcoins. Essentially, people lost faith in Mt. Gox bitcoins and the owners of them could not trade them for other currencies. There are people betting today that those owners may get back some of those bitcoins and are willing to pay very small fractions of what that amount of Bitcoin may actually be worth. The value of those Mt. Gox bitcoins had essentially gone to zero.

The dollar works the same way. As long as people have faith in the currency then they will continue to trade for them. Once people think that the value of that currency is going to be less tomorrow than it is today, then they will not want to trade for them, or at least they will want to hedge against this inflation and want even more of this currency. Tomorrow they'll want even more. More dollars will have to be created to keep up with this demand. In this example, inflation is the result of hyperinflation, caused by a currency so weak that it has essentially lost its value.

Inflation and hyperinflation are not the same thing. You cannot say that hyperinflation is just inflation multiplied or "super" inflation. Inflation is an economic condition simply stated by "too many dollars chasing too few goods". More dollars printed means even more dollars chasing those same goods and hence, an increase in price. Hyperinflation is a socio-economic condition. No one knows or can predict exactly when it will happen and, chances are, no one will know they're in hyperinflation until long after it has begun. As long as the people trading that currency have faith that it will be worth roughly what it is worth today, they will continue to trade it. Once the people, as a collective, lose faith in that currency then hyperinflation begins.

Expansion of money and credit. Only that. It can be allowed to accelerate only by the government deceiving the people into believing that there is another reason, like high profits on part of the capitalist pigs, or currency black market traders, or smugglers.

Trade Imbalances, Trade Isolation

Print of money and government using it to pay for budget and too liberal policies towards banks.

   I am just wondering what causes hyperinflation. I have heard some people talking about the velocity of money being an important determinant of inflation, but I don't really know what is meant by velocity- is this the number of transactions relative to the size of the money supply? I remember savings being really important int eh Keynsian models, but I don't remember exactly why.

    A few questions- looking at cases of hyperinflation, how much did the money supply grow to result in hyper inflation, and how much was caused by selling pressure. I know in the Asian financial crisis, a lot of national currencies crashed just because of speculative selling, in spite of their monetary policy being basically sound.

   I think the answers to these questions could be helpful in determining to what extent the petrodollar would have to erode to reach the event horizon of inflation. I mean, there must be some equation, involving the growth of money supply, velocity of money, selling pressure, and productivity growth that could be helpful in modeling the breaking point...