A Tale of Hyperinflation

In case you have not heard, Iran is experiencing  real-time hyperinflation, with an monthly inflation rate of ~70%. To put this into context, the US monthly inflation rate (measured by the CPI) has averaged about 0.16% per month for the past year. Usually hyperinflation is attributed to money printing, which is usually tied in with deficits/debt. The argument is simple, the government doesn’t have enough revenue generated through taxes to pay for spending, so they print money in order to finance it, otherwise known as debt-monetization. This argument is bologna because those who usually make this argument usually don’t understand the monetary system in which most countries operate in today (they are stuck in the “gold standard thinking”). All that the $FED is doing is swapping assets (trading reserves for treasuries). If it was truly monetizing debt, the amount of net financial assets in the private sector would increase, however, this is NOT the case. Only fiscal deficits and/or current account surpluses can increase net financial assets for the private sector.

 

 

 

 

 

 

 

 

 

 

 

 

 

Anyway, back to Iran. As we know, Iran is heavily dependent on oil. So goes oil, so goes Iran’s economy. If you have been paying attention to news over the last few months, you would have heard that many nations have adopted sanctions against Iran. The US, a major user of oil, already doesn’t import Iranian Oil. 42% of Iran’s oil exports go to countries that have signed agreements within the last year to stop/slow down Iranian oil imports. This puts a strain on the Iranian economy as they no longer have markets to export to. And despite these sanctions, oil prices have not shot up, mainly because of the ramp up in Iraqi oil production.

So, lets get back to the hyperinflation part. As we know, Hyperinflation is MORE than just a monetary phenomenon. You don’t need to print money to experience hyperinflation. All you need is a collapse in production and/or some dramatic shock/change—although most cases involve some type of exogenous shock (like losing a war or regime change). In Iran, we are seeing the loss of  faith in the (Rial) currency. One of the reasons I believe hyperinflation is occurring,  as I argued months ago, is because the US is using economic warfare to “beat” Iran. David Beckworth asks if this was part of some grand plan by the US Government, and you sure as hell can bet it was. So to conclude, no, it is not “money printing” that causes hyperinflation (While it is old data, Iran last reported broad money annual growth at -40%) .

So, will we see Hyperinflation in the US? It is VERY unlikely, especially given that the US is a democracy. The $FED ‘s money printing is nothing more than an asset swap, and only really changes inflation expectations, which in my opinion, is not a main driver of inflation (will leave that for a future blog post). If you want to front-run hyperinflation, what you need to do is look at truck drivers, cause if they ever stop driving, the whole economy will shut down and we will experience hyperinflation despite demand being low.

Here is an awesome “info-graphic” via Business Insider. It shows a theoretical timeline of the deterioration of the economy following a truck stoppage. If this (a collapse in production/output) happens, expect a loss of faith in the US Dollar ($USDX) within days and total zero-hedgeian chaos (Yes, I just used Zero-Hedge as an adjective).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tags: $FED $MACRO $USDX $USO

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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