Living With Hyperinflation

Hyperinflation isn't something we can truly prepare for. Yet, if it happens, we must learn to live with it.

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Americans have been living with chronic inflation for at least two years now. Though it appears to have slowed considerably, it’s not going away either. The 2020s are likely to be an overall inflationary decade and, in ten years, life will be much more expensive than it is today and our standard of living is likely to have fallen some as well.

But are we headed towards hyperinflation? It’s a unique variant of inflation where the cost of goods and services rises very rapidly - think 50% or more - every month. During the worst of the inflation wave in 2022, the month-to-month increase never exceeded 2%. However, given that we’ve lived for at least a generation where the year-to-year inflation rate was around 2%, you can see why so many of us, myself included, were jarred to see prices going up between 1-2% every month.

Short-and-sweet isn’t my specialty, so here’s an outstanding summary of what causes hyperinflation:

The exact circumstances leading up to hyperinflation are always a bit different, but in the end, there is always a single root cause.

A government encounters some crisis, like a war or economic crisis. In response, it prints large amounts of money to cover the costs.

The increase in the money supply, and doubts about the future stability of the currency, cause citizens to exchange their inflating currency with hard goods while they can. Simple supply and demand results in prices increasing even further, and in response, the government prints even more money, attempting to spend its way out of the situation.

Prices start increasing exponentially, and eventually, anyone who held the currency is wiped out.

I find hyperinflation highly unlikely in the United States currently and for the foreseeable future (the next 5-10 years). As explained above, it’s something which happens under circumstances that are dire to begin with, conditions that don’t exist currently. However, I believe hyperinflation will eventually occur in the U.S. There’s an outside chance of it happening within the next 20 years and a greater chance of it happening in our lifetimes.

When it does, it’ll probably happen either at the end of our superpower phase or, more likely in my view, at the end of America in its current geographic and political form. The same way Germany’ hyperinflation came on the heels of the collapse of the German Empire following its defeat in World War I and its subsequent transition to the Weimar Republic, America’s own bout of hyperinflation will become much more likely when this post-1945 order which has defined our existence and that of much of the world finally gives out.

Recall billionaire investor Ray Dalio’s empire life cycle model:

Hyperinflation is something that tends to happen during the “Print Money and Credit” stage of the empire. This is because the debt bubble has burst, the economy declines precipitously or outright collapses, and the state needs to step in to shore things up and prevent a total system collapse. That usually involves printing massive amounts of currency: how else are you going to pay off massive amounts of debt and engage in the spending necessary to keep things going?

Currently, I place the U.S. either in the “Debt Bubble and Big Wealth Gap” stage of empire, or at its peak. There’s currently an ongoing debate in Congress over raising the debt ceiling again to forestall default. We’ve been doing this for years and years and as long as we keep doing it, we’re going to keep racking up debt and very little will fundamentally change. Bearing in mind that we crossed the point of no return decades ago with respect to paying off this debt, if they fail to raise the debt ceiling and we do end up defaulting, something fundamental has changed and you should expect to see things change, if only incrementally.

I thought to write about hyperinflation after coming across this piece from the BBC. Argentina is no stranger to hyperinflation and has lived with it for at least a generation. It’s now rearing its ugly ahead again and I’ve always wondered how Argentines have managed to survive in an environment where the cost of living continuously rises at an astronomical rate and your purchasing power declines on a daily, sometimes hourly, basis. I’m not sure how Argentina continues to exist. But it does, a sign that no, hyperinflation isn’t the end of the world and yes, you can live with hyperinflation.

Here are some of the highlights from that must-read piece:

"I buy everything on interest-free instalments [sic]. Payments are usually spread over 3 months or more," she explains.

So even if Monica does not have the money to buy a pair of shoes costing 20,000 pesos outright, she will try to buy them in four 5,000-peso instalments, rather than risk returning to the shop once she has saved up 20,000 pesos and risk the shoes' price having risen to 25,000 pesos.

"If I can't pay in instalments, I usually won't buy it," she says.

Aside from big purchases, like cars and homes, Americans have little experience with which to relate to this. Imagine paying by installment for every little item, including clothing! There’s literally no other way to afford absurdly expensive common goods and services except to pay it off over time.

Another aspect of hyperinflation that’s diffcult to relate to: the lack of incentive to save money:

But even for those who may have some money left at the end of the month, skyrocketing inflation is proving a problem.

Saving pesos when inflation is this high means your savings will devalue quickly.

If you put 100,000 pesos in your savings account in February 2022, you will have 100,000 pesos plus interest a year on. But as the rate of interest is lower than the rate of inflation, your pesos will be worth less than they were a year ago.

So what do Argentines do with money they may have left over at the end of the month?

Noira, a nurse from the city of Mendoza, says she tries to buy large quantities of goods that will not go off.

"I buy popular non-perishable things like coffee and toilet paper in bulk to prevent the devaluation of my salary," the 59-year-old explains.

“Buying in bulk” means something entirely different in Argentina. It doesn’t mean you go to Costco and buy items that come in large quantities at discount price like we do in the U.S. Instead, it means we empty our bank accounts quickly by buying large amounts of goods so we don’t need to purchase them at higher prices later on. You hear this same tale told in other countries that’ve experienced hyperinflation - the instant you get your paycheck, you’re off to the stores to get whatever you can before things become totally unaffordable once again. Americans hear the phrase “shopping spree” and “splurge” and regard it as a luxury, but for Argentines, it’s necessary. There’s just no other way to avoid being priced out or having nothing left to purchase.

Given the recent uncertainty concerning the U.S. dollar, some of you may be surprised to read this part:

Even though the peso is Argentina's national currency, many Argentines like Noira have little faith in it and prefer to convert any spare pesos into dollars.

Business student Jorge, 23, not only has more faith in the stability of the dollar than the peso, he also has little trust in Argentina's banks and therefore prefers to keep his dollars at home.

…

But buying dollars in Argentina is not a simple transaction.

The government has limited the amount of dollars Argentines can buy at banks or official currency exchanges to $200 a month, to avoid its limited deposits of dollars being depleted.

This has led to a vibrant informal market in dollars emerging where the US currency - dubbed the blue dollar - is sold at much higher prices.

The dollar won’t be the world’s reserve currency forever. At the moment, however, there are still millions, if not billions, of people all over the world who still view it as a rock-solid store of value, or even a valuable commodity itself. Even if it’s just fiat currency at the end of the day, there’s no question the dollar is regarded as valuable simply for being the dollar, backed by the full faith and credit of the U.S. federal government. It’s why I don’t have much patience for those who think the dollar is worthless or we’re on the verge of it losing world reserve currency status. As long as countries the world over, to say nothing of 300+ million Americans, deem it valuable, the dollar isn’t going anywhere. For now and for the foreseeable future, there will always be a market for the U.S. greenback.

Geopolitical scientist Peter Zeihan recently explained why the de-dollarization panic is just that: a panic. It’s a short video, so I hope you’ll watch it, because Zeihan explains it well as he usually does:

If you didn’t watch, it basically comes down to a lack of an alternative. Not a single person can make a convincing argument that the world is willing to move off the dollar and suffer the consequences of doing so, nor can they provide an alternative currency the world is ready to move onto. There really isn’t anything capable of replacing the dollar - China’s yuan, for example, is so tightly-controlled by the central state, it’s simply not available on the world market in the numbers needed to displace the dollar. Nor is China willing to relinquish control, since directly manipulating the value of the currency is very much the point.

I also hope the crypto-craze is starting to die off by this point. It was apparent it was fueled by speculation (I can’t tell you how much hate I got for stating the obvious) and whatever value it had was denominated in… wait for it… the dollar. Does that sound like a hedge against hyperinflation? Getting mad at me for pointing out the obvious won’t alter reality, I’m afraid.

The dollar’s reigning position on the world stage explains why we’re not headed towards hyperinflation. At the same time, other factors, such as the ongoing supply chain crisis, the printing of large amounts of currency in the last few years, has helped create an inflationary environment. It’s likely, in my opinion, the U.S. will avoid hyperinflation in the next five to ten years, while still experiencing chronic inflation through the loss of purchasing power at home. That, I think, is unavoidable.

Hyperinflation is like civil war: most normal people don’t think about the possibility of it, while those who do think about it get their emotions wrapped up in it. The same way telling folks a civil war won’t happen seems to trouble them greatly, telling people hyperinflation won’t happen triggers a similar reaction. There are YouTube channels and self-styled open-source intelligence agencies who peddle these worst-case scenarios just because they’ve found a way to argue in favor of its plausibility. They try to sell you all sorts of products and services in the name of preparing for the cataclysm to come.

My advice? Prepare reasonably, but don’t take any of these worst-case voices too seriously. This sounds macabre, but what they’re trying to do is sell you the idea we can survive our own deaths. Even worse, many of these people who are so certain hyperinflation is coming have never lived through hyperinflation. I don’t hear them refer their audiences to those who have, like Argentina native Fernando “Ferfal” Aguirre. Read his book The Modern Survival Manual: Surviving the Economic Collapse to learn what life was like following the 2001-2002 economic collapse in Argentina; it was very bad, yes, but it was also nowhere near as dramatic as the social media sirens claim hyperinflation will be. Ironically, some things are so devastating, you have no choice but to simply go along for the ride. It makes you wonder why the doomsayers are so emotionally committed to the idea of terrible things happening.

The lesson here, as always, is: be careful from whom you take your advice. The attitude you discern from those who’ve lived with hyperinflation is vastly different from that of those who haven’t, but insist they know what’s going to happen. No, the cities don’t burn down into massive heaps of ash and millions won’t die. Buenos Aires is still standing and brightly-lit, the last I checked. Don’t listen to those who rattle off a list of all the awful things that’ll happen, but if you take their advice, you’re going to survive. The reality is, hyperinflation isn't something we can truly prepare for. Yet, if it happens, we must learn to live with it. Even ruralites are going to be impacted by hyperinflation, in some ways worse than those living in the cities.

Millions of Argentines have known nothing other than hyperinflation their whole lives. They’re all still here. Maybe they’re the ones who have something to teach us?

UPDATE: Just came across this outstanding tweet explaining why there exists no clear and present danger to the dollar’s world reserve currency status:

https://twitter.com/amlivemon/status/1646779292955688960

I regard this as the most significant part of the story:

Finally, the global financial system is deeply entrenched in the use of the US dollar, and changing this system would be a slow and difficult process. Many countries and international organizations hold large amounts of US dollars, and it would take significant time and effort to shift away from the dollar and establish a new reserve currency.

Switching to a new reserve currency doesn’t happen in a year. It’s also not as conscious a decision as recent events - Brazil and China planning to do business without the dollar, for one - suggest. When the dollar ceases to be the world reserve currency, it’ll likely be the result of a new global player capable of displacing the U.S. in almost every respect. Remember the dollar becoming the reserve currency tracked with the U.S. progressively displacing the British Empire as the world’s superpower. Even before achieving superpowerdom, America was an economic powerhouse, making it virtually assured that it’s currency would be worth doing the world’s business with.

Some people say the dollar has either hit or exceeded it’s expected lifespan as reserve currency. I say: wait until the 2030s or until it actually begins to precipitously lose value in comparison to foreign currencies, which ever comes first.

Max Remington is a defense, military, and foreign policy writer. Follow him on Twitter at @AgentLoyalist.

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