Inflation is much more than a monetary phenomenon; it rips at the very core of social cohesion. Secular high inflation is one of the worst possible experiences a population can face. We are now heading for what looks like global high inflation across all currencies, with multiple episodes of hyperinflation. It will be unprecedented.
The Four Phases of Hyperinflation
Hyperinflations are generally defined as periods in which the monthly inflation rate exceeds 50%. In this 2018 paper, the IMF breaks hyperinflationary episodes out into four phases which comprise two stages:
Phase One: is “the rise”. The IMF also calls this “the extraordinary acceleration phase” which is the lead-up to the hyperinflation. IMF actually terms it “the path toward hyperinflation”, but given that they define that as an annual inflation rate of greater than 50% but under 500%, an uncredentialed, non-economist observer might describe that as already being hyperinflation.
“The average duration of the first phase is 8-9 years with an annual average inflation of 125 percent”
Phase Two: is the actual hyperinflation proper.
Wheelbarrows of money, burning banknotes in the oven (or more tragically, sticking your head in there).
In one well storied example from Weimar Germany, an emigre fighting to retrieve his savings from a German bank was finally paid out – via a cheque mailed to him in America. The stamp on the envelope cost more than the value on the cheque made out to him.
Over the eighteen 20th century hyperinflations covered in the IMF paper, the average inflation rate here, according to the IMF study was 2,912% and the median duration was four years – this “explosive” phase is usually over in about two years.
Venezuela, isn’t in the graph because their hyperinflation took place in the 2000’s. It is noted therein, that the inflation rate there hit 488,865%.
As we’ve covered in the premium letter, Venezuela has undergone three currency devaluations over the 14 years, knocking about half a dozen zeros off their banknotes each time (via the July 2021 issue of TCC):
Venezuela is launching their Digital Bolivar CBDC in tandem with a currency redenomination that took effect Oct 1st. They knocked six zeros off of their banknotes in an effort to get in front of the hyperinflation which has ravaged the economy for years. This is the third currency redenomination for Venezuela in 13 years. In 2018 they knocked five zeros off the currency and in 2008 they took away three zeroes. Maybe this is another indicator of hyperinflation? When the time between redenominations shrinks while the number of zeroes removed increases….
(The prior two devaluations also coincided with the launching of a Central Bank Digital Currency).
Phases Three and Four are the second stage of a hyper inflationary event: “disinflation” – where the annual inflation rate plummets to somewhere between 50% and 500% and lasts another six years on average – and finally the “stabilization” phase, where inflation remains under 50% per year for at least three years.
The case for a “Phase Zero” of Hyperinflation:
I would argue that there is a Phase Zero: where the future inflationary path becomes baked in by unsustainable debt. While policy makers are still able to talk with a straight face as if there is an alternative, the path to inflation is assured.
We’ve been in Phase Zero for over 50 years, since the Nixon shock of 1971. We are at the edges of the Phase Zero to One transition now.
Back in the 1940s during WWII, public debt to GDP quickly jumped from 40% to over 100%.
But, this actually understates the scale of what happened. Debt went from $43 billion to $258 billion, which was a 500% increase in five years. pic.twitter.com/6rA4bglkBp
— Lyn Alden (@LynAldenContact) February 25, 2023
Phase zero could probably be defined as the moment a currency becomes fiat. We notice from Lyn Alden’s chart, of US debt-to-GDP above, that after the World War II spending binge, the ratio actually declined. Over the Leave-It-To-Beaver and Hippies era, it came down to below the level it was before the war. Then came the Nixon Shock in the early 70’s, when the last vestiges of gold convertibility were suspended (“temporarily”).
Since then, the global monetary system has been irrevocably committed to an inflationary path. In this James Lavish Twitter thread, various participants look at how the interest due on America’s debt has entered the territory where it is cannibalizing the budget expenditures.
When you have to borrow more, at higher interest rates, this is what happens. It’s really simple. And scary. pic.twitter.com/zA3eyVfBdq
— James Lavish (@jameslavish) February 20, 2023
Seen in this light, it’s no surprise that central banks around the world are already backing off the interest rate hikes (Canada has already said they’re on hold, and the only thing the US is meaningfully tapering is the size of the rate hikes).
[ Insert: In previous editions of the letter it was always reiterated that the Fed will continue hiking “until something breaks” in the credit markets / banking system. Given the startling and rapid collapse of the Silicon Valley Bank over the past couple days, we may be getting there ]
If the Fed slows down hikes, they have to normalize higher inflation.
The folks over at Zerohedge once predicted that when it becomes clear that the Fed can’t control money supply, they would start dropping “leaks” that the hallowed “target inflation rate” would be raised.
Right now that’s 2%, pretty well across all civilized nations. That’s the golden rate at which governments can embezzle wealth from the economy and the peasants will let them get away with it.
But to get inflation down to that level, according to this Obama-era advisor, that would mean in excess of 6% unemployment for two years. The Fed wants “demand destruction” (which means people lose their jobs or their business) – but not too much demand destruction.
Apparently 6% for 2 years is too much, so the level of embezzlement will have to be raised. It’s not like we’re talking hyper-inflationary numbers, yet – right?
But raising a target inflation rate from 2% to 3% is a 50% hike in the rate of theft.
Fear not, the corporate press is always there with a solution. In this case it’s the Wall Street Journal suggesting you could skip breakfast
“Several breakfast staples saw sharp price increases due to a perfect storm of bad weather and disease outbreaks—and continued effects from Russia’s invasion of Ukraine.”
This reminds me of the infamous Bloomberg piece on how to make ends meet on a measly $300,000 / year… advice included that you get rid of your car, switch from eating meat to lentils… and euthanizing your dog.
This all jives with our core premise that the ESG movement is so widely endorsed by “woke” capitalists because it provides cover for the reality that we are in an unsustainable debt bubble and monetary expansion – and that the rabble has to ratchet down their living standards to cope.
We can look at weaker economies to see what the future looks like: Lebanon just did a currency devaluation – reducing the official exchange rate by 90%, overnight. This came after a spat of bank robberies, where citizens were sticking up banks to get their own money out.
Now they’re burning them down.
In Lebanon people are burning down financial institutions and politicians’ homes to reclaim their own money which has been frozen by the banks.
Keep in mind with CBDC the financial establishment has the ability to freeze your money with a push on a button….. pic.twitter.com/kNIn8Z1Gbh
— Richard (@ricwe123) February 19, 2023
On January 31st, Lebanese citizens went to bed thinking the official exchange rate on the Lebanese pound was around 1500 to 1 USD, (whether or not they could actually get at their money, that was the rate).
When they awoke the next morning, the official exchange rate had been set to 15,000 Lebanese pounds to 1 USD. The black market rate was even worse, coming in around 64,000.
In Bitcoin terms, the collapse was even more pronounced:
The fiat system is collapsing, weaker currencies first – but anything not backed by something tangible is headed for the dumpster of history.
In prior high inflation or hyperinflationary events, people could always seek refuge in other currencies or adopt some kind of “notgeld” (emergency money). But in this chapter, it’s every currency, across all political affiliations, and jeopardizing every incumbent power structure.
(Which is why it seems like the world is sleepwalking into another world war, if we’re not already in the early innings of one.)
It may seem like being on alert for hyperinflation here in the West is bonkers, but we’re already seeing massive fissures in the financial system opening up from normalizing interest rates to %4.57, well below even the official rate of inflation – and that hallowed “Fed Taper” still hasn’t even gotten going yet…
It probably never will.
Banking crises are here (we’ve had two in under a week, if you count the Elizabeth Warren-led rat-fucking of Silvergate), and former Treasury Secretary Larry Summers went on Bloomberg to say this “won’t be a source of systemic risk”. It remains to be seen if that utterance gets filed next to “sub-prime is contained”.
If we squeak through this crisis, we buy some time but only forestall the inevitable destruction the global financial system, which explains the incessant drive toward CBDCs, but that could all be too late, given the rate of collapse.
This morning I woke up to see USDC had de-pegged to as low as 0.82, and while it looks like it will probably re-peg in due course (I sent a note about that to my premium list earlier today), it reinforces my core tenet that volatility aside, the only thing I really trust to be around for the foreseeable future, (and that I can move in an instant during a financial collapse) …is Bitcoin.
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With regards to ESG being an excuse to normalize frugality, for the public, maybe so. But the Governments don't seem to show any signs of slowing their spending. In fact the Green New Deal appears to be the latest excuse for Uncle Sam to spend the taxpayer dollars at warp speed, another transfer of taxpayer wealth to the Good Old Boys of Government Club. Spend for me at the expense of thee?
HyperBidenstagflation. Interesting times.