Wednesday, June 3, 2009

How Zimbabwe Type Hyperinflation Could Come to America

Money manager Marc Faber says the U.S. economy will enter hyperinflation approaching the levels reached in Zimbabwe.

Zimbabwe’s inflation rate reached 231 million percent in July 2008, the last annual rate published by the statistics office.

I am not 100% sure the U.S. will go into hyperinflation, but I do believe it is a possibility that can not be ignored. As I pointed out in my post, The Big Collapse Could Be Very Near, the U. S. dollar is in a unique position because of its status as an international reserve currency:

Other countries have had collapsed currencies, but never in the history of the world of finance has so much currency been held outside a country of issue, that could come flying back, almost on a moments notice. If the panic out of the dollar starts, even if Bernanke stops printing money (unlikely), all the dollars flying back into the U.S. could cause a huge price inflation all on its own.

Couple this with the fact that the government needs to raise approximately $2 trillion in new debt this year, and something has to give.

Either government spending has to be cut way, way back--obviously unlikely under Obama, or the Federal Reserve is going to be buying a lot of debt by printing money. Who else is going to buy it? At some point the American public (and in the dollar's case, world dollar holders) figure out that the money printing is going to lead to more and more price inflation, and people start to buy anything rather than hold dollars. It will be the exact opposite of what we have now, instead of a strong demand to hold cash balances, the opposite will occur. There will be a desire to spend the depreciating dollars by keeping cash balances low.

At some point this madness takes on a life of its own. Treasury bond interest rates suddenly jump to 10%, which will be viewed as unacceptable by the Obama Administration and so Bernanke, by making huge Treasury purchases, gets the rate down to 8.5%, but the new money used to push rates down pushes price inflation even higher and, thus, puts upside pressure on Treasury bonds, which results in rates climbing to 15%. Of course, this will be viewed as unacceptable and Bernanke will have to add twice as much money as last time to get rates down to 12.5%. At this point the Chinese will be in total panic, and use the Bernanke buying support to unload the remains of the U.S. bonds they hold, which will mean even more money printing by Bernanke to take the Chinese out of their position. This will mean even more inflation and the Treasury bond interest rate climbing to 25%. And the vicious circle continues. That's how you can end up getting to Zimbabwe type inflation, 500 basis points at a time.

Nobel prize winning economist F.A. Hayek didn't title book his book on inflation, A Tiger by the Tail: The Keynesian Legacy of Inflation , for no reason.

Can this be stopped? Of course, it can. It would mean cutting government spending by 75% and a complete halt to Fed money printing would be required. It would mean a near complete restructuring of the economy. Is there anyone in office in a position to do this? I doubt.

Ron Paul has a strong following, but not strong enough to counter the Big Government supporters. Thus, it most likely won't be a planned restructuring of the economy. The market will take care of things and force restructuring through hyperinflation. It won't be pretty. A few who are quick and understand how to take advantage of hyperinflation will make huge fortunes. For the remainder, it will be a stunning collapse in their standard of living.

For years, investment newsletters have been speculating about such a hyperinflation scenario. We are now beyond the speculation stage. The end game has begun, whether we have 6 months or two years before things get really ugly, it is now clear to me that the problem is not 10 years out. The lightning of the coming storm is still somewhat in the distance but the sound of the thunder is getting closer and closer.

This is not a time to be casual about your finances. It is a time to pay close attention and read as much as you can about prior hyperinflations, so you will get clues on how to survive (and prosper) under what will be terribly difficult conditions for most.


  1. Thank you for the clear logic. How will the "quick" profit from hyperinflation? Gold, food, farmland?

  2. Wenzel,

    I reccommend FerFAL's blog, Surviving in Argentina, found here:

    It's written by someone who is living in a collapsed, "failed" state country (this state seems quite successful to me, however, but my critera for a successful state is one which is as criminal as it can possibly be without people revolting) and who has experienced all the monetary turmoil, including (hyper-)inflation that came along with it.

    It's scary stuff! But you can survive.

  3. Hi Robert,

    Thanks for the great post on this.

    Jack Maturin

  4. There is only one thing that you haven’t mentioned that could help to keep inflation in check and that is raising (or creating new) taxes to support the spending (VAT, employer health benefits, etc.). The problem there would be how much tax revenue can a family tolerate before the reduction of net cash begins to take its toll just a inflation would. How would tax increases change this scenario?

  5. The U.S. Federal Government collected $2.52 trillion in FY2008, while spending $2.98 trillion.

    According to AIER, tax revenues in April were down by more than 30%. Thus, you would have to come close to nearly doubling taxes to wipeout the deficit. It's not going to happen.

  6. If we kept our books the way the government kept theirs, we would be in jail. Funny how that works.

  7. Nicely put. We are caught between a rock and a hard place. Let the economy restructure or continue to prop up the malinvestments?

    The answer, of course: more government, higher taxes, more central planning! What else? Ha

  8. In an article on Bloomberg yesterday (June 3), Bernanke is quoted as saying: "Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation. The Federal Reserve will not monetize the debt."

  9. only chance now - buy the put options on dollar sale in, say, 2 yrs...what do you think? I checked with my banker latelty and the premium for this is about 5% on the amount. If dollar drops by 20% in 2 yrs, then hey, that makes a lot in revenues nay? Well if dollar goes down by 50% against my currency (CZK - anybody of you american guys ever heard of? :-D ) then this is the way. Ah, btw, CZK is not tied to EUR and thus will remain as one of the strongest EU currencies, unless something go seriously wrong (we are after all big way in automotive...) and as long as EUR follows similar fate as USD. Or so the forecasts say...

  10. Who want to know how was hyperinflation in Brazil go to and see a summary about an e-book (in PDF format that can be download for free, in portuguese) with 319 pages. The idea shown in EconomicPolicyJournal is very right. Hyperinflation in US may happen or not. If it will occur will be in next weeks and will be of zimbabwe type. First drops of rain alreay are falling.

  11. Who want to know how was hyperinflation in Brazil go to and see a summary in english about an e-book about the affair (that can be download for free in PDF format, but in portuguese). The author of EconomicPolicyJournal is very very correct. The first drops of the rain is falling now. Something will happen in the next weeks. Either all stay as is now or the storm begins. If begin, it will be a Katryna. But there is a good thing: is the government who will do the choice. Hyperinflation only occur when government wants it.

  12. Thanks for giving such detailed information. According to hyperinflation is in which entire currency of an economy is discarded or gets replaced.