The Hyperinflation Bet Never Made Sense

I was reading Bonddad’s post, “Why Does Anyone Listen To Conservative Economists Anymore?” – and it got me thinking about hyperinflation. But that wasn’t the only reason. The “Black Swan” is back in the limelight and I saw people on twitter link to this post from 2009, titled: “Taleb’s Hedge Fund Betting on Hyperinflation“.

I’m going to be blunt here. The hyperinflation (in the United States of America) bet never made sense.

Here’s Why.

1) Lets say you even believed that all fiat currency was doomed. Why would the US dollar ($USDX) go first? You would think the US dollar being the reserve currency and the currency of the biggest economy in the world,  it would be harmed last. Don’t take my word, listen to what Mish says (this interview was actually good).

2) Now, lets say you’re not a fiat-doomer, but were worried about the expanding money supply. But ask yourself this, why would all that “money” go into the economy right away? People assume just because the $FED “prints”, it means more dollars/money ($UUP) automatically in the economy. This is not true. You need LOAN demand to get those dollars into the economy; that’s just the way our system is structured. And given that we have been in a balance-sheet recession since late 2008, loan-demand increasing too quickly should’ve been the last thing on your mind.

By the way, in point #2 I assumed you believed the Money Multiplier, which leads me into point #3.

3) The money multiplier is a myth! Bank-lending is not reserve-constraint, but instead is capital-constraint (among other things). We are always at risk of loan-demand picking up too fast, but these risks are managed by regulatory (Higher Capital requirements, stricter lending requisites, etc) and monetary (‘tighter money’) policy. So the likelihood of ‘loan-demand’ getting out of hand and those reserves escaping to the economy is nonsense.

4) Lastly, Hyperinflation is not only rare, but is highly exogenous & usually politically driven. It is caused by exceptional & extraordinary events or actions, like having your whole productive base destroyed in a war, or having debt-denominated in foreign currency. More on that here (here & here as well).

I’m not saying that it is never a possibility for the US (that doesn’t mean I think it’s going to happen either), but if you are betting on it year after year, you are going to lose money. Heck, we could barely generate mild inflation!




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