Thread by @jameslavish

*Hyperinflation*

With inflation soaring the past two years, this term is being thrown around quite a bit recently.

And people are starting to wonder: Could the USD hyperinflate?

Time for a Currency 🧵👇

🤔 What is hyperinflation?

First, hyperinflation is when a currency experiences extraordinary and accelerating rates of inflation

The currency's value falls so quickly it becomes virtually worthless

So, people resort to using alternative forms of money or bartering.

Though incredibly subjective, the academic definition for hyperinflation is when a country experiences inflation rates above 50% per month. Not before that.

49% = “regular inflation” and 50% = “hyperinflation”

Got it. 🤡

In any case, it’s hard to discuss hyperinflation without examples of the Weimar Republic being raised

And you’ve likely seen charts and graphs of Weimar German mark hyperinflation before

If not, it looks like this:

But what is this measuring, exactly? And what caused it?

Simple. Money printing

Well, well, well. Where have we heard that term before?

See, in order to pay for war reparations imposed by the Treaty of Versailles, the Weimar Republic German government began printing excessive amounts of money

This ultimately led to the German mark collapse (see above chart) with prices doubling every few days by the end of 1923.

And so, what the chart shows is the number of paper marks required to buy a *single gold-backed mark*

Yes, in a span of five years, a gold-backed currency that was ‘worth’ one paper mark was suddenly worth *one billion* of them.

As for causes, hyperinflation is basically the result of poor monetary and fiscal policy, leading to large budget deficits, eventually requiring excessive money printing (gov't buys its own bonds to keep up debt charade), which leads to a total collapse of confidence in currency.

The path to hyperinflation:

poor fiscal policy → budget deficits → money printing → collapse of confidence in currency → collapse of currency

You may now be asking, where else has this happened, can it happen again, and could it happen to the USD, too?

Let’s answer these one by one.

😵 Other currencies that hyperinflated

During the breakup of Yugoslavia in early 1990's, the gov't resorted to printing money to finance war efforts

This led to an inflation rate of *300 million percent* per month

And ended with a totally new currency, the convertible dinar.

In Zimbabwe from 2007 to 2009, reckless monetary policies, including massive money printing to finance budget deficits, led to hyperinflation of a staggering *89.7 sextillion percent per month*

That’s 21 zeros, or 89,700,000,000,000,000,000,000% inflation

Per month.

You may have seen photos of Zimbabwe currency, like this one

Zimbabwe eventually abandoned its currency and adopted a multi-currency system, primarily using the USD.

But the worst inflation ever recorded occurred in Hungary in 1956 to 1946, where after WW2, the Hungarian government printed endless amounts of money to finance reconstruction efforts and repay war debts

The result?

Prices in Hungary *doubled every 15 hours*

This means the Hungarian pengő lost over 90% of its purchasing power *every 4 days*

Because that’s so hard to even conceptualize, let’s look at some theoretical price moves 👇

This means,

A gallon of gas that costs $4 today:

• Costs $8,192 after a week,
• and $112,000,000,000,000 (112 trillion dollars) after a month.

Groceries that cost $120 today:

• Cost $245,760 after a week,
• and $336,000,000,000,000 (336 trillion dollars) after a month.

Rent of $1500 today:

• Costs $3,072,000 after a week,
• and $4,200,000,000,000,000 (4.2 quadrillion dollars) after a month.

Hard to even conceptualize with the numbers right there in front of you

In the end, Hungary introduced a new currency, the forint, which was pegged to?

You got it. The USD.

Some countries where inflation is currently raging are Argentina, Lebanon and Venezuela, where rates are being reported at over 100%, 250%, and 500%, respectively

Next stop: hyperinflation

But let’s next look at what happens to markets before, during, and after hyperinflation.

🫨 What happens to markets in hyperinflation?

It would make sense that markets fluctuate wildly due to hyperinflation

But there’s an evolution to the fluctuations that we should look at to understand what we can do to protect ourselves from hyperinflation in our own currencies.

In essence, domestic stock, housing and precious metals markets become extremely volatile, especially when priced in the hyperinflating currency.

Before hyperinflation:

• Stock markets: stock prices may initially rise as investors hedge against inflation by investing in companies that hold real assets or have pricing power

However, markets become increasingly volatile as inflation expectations grow, as does uncertainty

• Home prices: might initially increase due to inflation expectations and increased building material costs. But, demand often declines as uncertainty grows

• Hard assets: gold, silver, and other commodities are more desirable as investors seek assets valuable in any currency.

During hyperinflation:

• Stock market: becomes highly volatile with periods of rapid growth followed by sharp declines

The real value of stocks (inflation adjusted) decreases significantly, many companies fail due to inherent supply and wage challenges from the hyperinflation

• Home prices: may rise in nominal terms, but real value (inflation adjusted) likely declines

Still, prices remain somewhat stable, as people seek ways to protect their money by buying hard assets, and foreign investors buy at decreased exchange rate values

• Hard asset prices: Hard assets retain their value during hyperinflation, as they are seen as a store of wealth

Demand for gold, silver, and other commodities surges in the region, along with local prices for them.

After hyperinflation:

• Stock markets: As a country stabilizes its currency and implements economic reforms, stock markets can start to recover

However, this process can take time and is marked by significant volatility

• Home prices: The housing market can also stabilize as the new currency or monetary reforms are adopted

As the economy recovers, home prices may begin to rise again, at a more sustainable pace

• Hard asset prices: Outsized demand for hard assets declines as stability returns, and investors regain confidence in the currency and financial system

But hard monies retain their global purchasing power.

One key note: countries with hyperinflation typically have a collapse of confidence in the banking system, and a run on banks

Investors, seeking to buy hard assets, withdraw as much cash as possible before banks freeze accounts and refuse withdrawals.

We’ve unfortunately seen this exact thing happen in Lebanon this year, with irate customers resorting to robbing their banks in order to get their *own money* back.

(CNN:)

Any way you cut it, hyperinflation is a painful phenomenon that leads to serious civil unrest and financial devastation for the average citizen

Unfortunately, no single fiat currency is immune to the phenomenon.

(REUTERS/Mohamed Azakir):

🫣 Could the USD hyperinflate?

So, does this mean that the USD could hyperinflate, too?

Well, let’s be clear

While it's a non-zero chance that the USD hyperinflates in the near future, my belief is that the USD will likely be last currency to hyperinflate in the world.

And even then, it is a long, long way off—again, in my opinion

Did you notice in the examples above, how a number of the currencies that hyperinflated eventually created a currency that was pegged to the USD?

This means the exchange rate is essentially fixed to the USD, moving with it lock and step

This also means the country will issue a significant portion of their debt, and keep reserves, in USD because of its stability and liquidity.

This keeps global demand for USD high, and as more and more currencies hyperinflate in the future, many folding into the USD, demand for USDs simply grows

But if you’ve seen me write about the US debt problem, the so-called debt spiral, you know this simply cannot last forever.

If you have not yet seen that post and want to read more about it, you can find it right here:

https://twitter.com/jameslavish/status/1636104435171737602?s=20

TL;DR: In a financial game of musical chairs, the Treasury keeps playing music (issuing debt and monetizing that debt), as investors slowly wise up to the risk of holding the so-called risk-less USTs and buy hard assets instead

The music will keep playing until no seats are left

And when the music stops, if you’re left standing with no seat—no hard assets—tough luck, kid. You’ve been devalued

Broke

The USD gets reset and the game starts all over again.

🧐 How you can protect yourself

I’ve been talking about it quite a bit recently, and as we’ve outlined above, one of the best ways to protect your hard-earned money is to own hard assets

Like #Gold and #Silver.

Like #Bitcoin.

I personally own all of these things as long-term investments, stores of value. How much you own is personal and up to you and your financial advisor

But as we saw above, in times of hyperinflation, no matter where you live, buying assets is essential to protecting your money.

One thing to note here, is that it is also essential to buy physical assets, not just paper contracts of them. Owning a house, you have the land, the dwelling, the physical property

Owning #gold or #silver coins, you have the physical hard monies.

Owning #Bitcoin in cold storage, where you manage and maintain the keys, is hard money

But owning a gold paper ETF, i.e., one that is not exchangeable for physical gold, only a theoretical paper derivative of it, is not hard money

It’s an IOU.

Same thing goes for #Bitcoin owned and held on a trading exchange

These IOUs will be the first to evaporate in the times of a crisis.

So please, be super aware of what you own, and how you hold it

It may be the difference between having a seat, or being left standing when the music does in fact, stop

And the music, eventually…always stops.

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