Inflation VIII: The Perfect Storm, or How Hyperinflation Appears

Hyperinflation is a terrible phenomenon: it is ruining a country and its people faster than it needs to be told. While inflation of 5 to 10% per year is already very harmful, hyperinflation of 1000% or more per year has disastrous consequences. How can we get there? Several ingredients are needed. The starting point is always the political influence on the central bank. In the past, there have been periods of hyperinflation when politicians used so-called cheap central bank money. This allows money to become available, regardless of the desired amount. It may surprise you, but the truth is that central banks can produce infinite amounts of money. There is no upper limit since gold and silver standards were abolished. A central bank can therefore ‘print’ as many billions as it wants. Today, of course, it does not print banknotes, but it increases the money supply by buying, for example, currency, real assets, stocks or government bonds.

It may seem implausible, but that’s how it is and therein lies the problem: politicians want to use this instrument to support its expectations. The Weimar Republic and Argentina are not alone in adopting this strategy. In Switzerland, too, politicians want to use the central bank to grant it to their demands. They forget that money issued by the central bank is not equity. Purchasing currency, for example, actually increases their balance sheet. The Swiss National Bank should be able to reduce this balance and withdraw Swiss francs from the market if prices start to rise. Yet some politicians refuse to admit it and don’t care about the consequences, as the saying goes “after me the deluge”. When the central bank is exploited, history teaches us that it often ends badly. And it usually happens like this: politics creates debt that it “transfers” to the central bank. The amounts that the government receives in exchange for the recognition of debts (government loans) can be used for more or less useful things, such as the salaries of civil servants, wind turbines or tanks. So the money circulates. The State does not have to finance these expenditures with tax revenues. Since the central bank keeps the IOU on its balance sheet, there is no need for private investors to buy it. It’s a perpetual motion machine! Unlimited free money.

A variant of money printing is that the central bank keeps its interest rates too low, pushing up the volume of bank loans even further. Money circulates there too.

In the beginning everyone is happy. Money flows into the economy, which is stimulated by this impulse. People can spend more. Unfortunately, the consequences are not long in coming in the form of price increases. After all, the more money is in circulation, the more it loses its value. That said, we are still a long way from hyperinflation. As long as confidence in institutions is maintained, inflation can be brought under control by tightening monetary policy. For this, the central bank must have a sufficient degree of independence, as a restrictive monetary policy is not popular, as it is often accompanied by a recession. If the government steps in to put an end to these unpopular measures, the masses say.

As the episodes of hyperinflation in Argentina, the Weimar Republic or other countries show, there seems to be a point of no return: above a certain level of inflation, anyone who turns their backs on that currency can. Whether at home or abroad, political statements are no longer trusted. We turn away from the local currency and exchange it for real assets or foreign currency as soon as possible. The exchange rate collapses and makes imported goods even more expensive. In order to guarantee the functioning of the State, more and more money has to be invested in the system. Prices explode.

In summary, several ingredients are needed to create hyperinflation: 1. The central bank of the country in question is not politically independent. 2. The central bank buys up government debt or keeps interest rates low enough for credit to multiply. 3. Trust in institutions is crumbling. 4. When the point of no return is crossed, the currency is in free fall.


Episode I: Beware of Monetary Illusions: The Franc Isn’t As Strong As It Was In 2015

Episode II: Four Explanations of Record Inflation in the US

Episode III: “This Time It’s Different”, Really?

Episode IV: A Phenomenon That Isn’t Neutral, But Rather Harmful In Reality

Episode V: The Independent SNB Strikes Back

Episode VI: Why isn’t the rise in oil prices having a stronger impact in Switzerland?

Episode VII: War in Ukraine Causes Inflation

Episode VIII: The Perfect Storm, or How Hyperinflation Appears

Episode IX: United States Monetary Policy and the EPC: Playing with Fire

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