Is Hyperinflation Really A Threat?

Is hyperinflation a threat? While I was on vacation this past week, I got into a discussion on the issue.

While the discussion ebbed between a broken financial system and capitalism’s failure, the gist was hyperinflation was coming. The measure of money in the system, known as M2, is skyrocketing, which certainly supports his concern. Now, with the Biden administration adding another $1.9 trillion into the economy, those concerns have risen.

hyperinflation threat, #MacroView: Is Hyperinflation Really A Threat?

In a recent Bloomberg interview, Larry Summers stated:

“There is a chance that macroeconomic stimulus on a scale closer to World War II levels will set off inflationary pressures of a kind not seen in a generation. I worry that containing an inflationary outbreak without triggering a recession could be even more difficult now than in the past.”

Are those concerns valid? Should we worry about a hyperinflationary surge like we saw in the late 70s? Or, are the deflationary pressures on the economy still present?

 

The Difference Between Inflation & Hyper-Inflation

Let’s start by defining the difference between an inflationary increase and hyperinflation.

Could repeated stimulus into the economy that exceeds the current output gap lead to a rise in inflationary pressures? Absolutely.

hyperinflation threat, #MacroView: Is Hyperinflation Really A Threat?

However, “hyperinflation” is not a threat. At least not yet.

“Hyper-inflation comes from a complete loss of faith in a currency from the threat of losing a war (Weimer Republic), an economic collapse, or some other catastrophic event. The U.S., even with all of our economic ills and woes, is still the safest place, in terms of liquidity, depth, and strength, to store excess reserves. The near historic low yield on government treasuries tells the story here.” – Real Investment Show

What is important is whether or not inflationary pressures, regardless of where they come from, have reached levels that could impact economic growth. While we see commodity-based inflation, primarily in food and energy, is that alone enough to offset the deflationary pressures we see economically from wages, debts, deficits, and rising dependency on social welfare?

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