Many of my clients worry that today's easy money will eventually have devastating inflationary consequences. Are they right? As a world-class nonexpert on hyperinflation, I decided I needed to hit the books. After boning up, my short answer is no — but with some caveats.
The Fed's Risky Inflation Strategy
First, there is a lot of irresponsible talk that easy money and large deficits will inevitably lead to hyperinflation. Glenn Beck has been predicting hyperinflation since 2008, saying he has more faith in a piece of paper towel than in the U.S. dollar. Every ultraconservative Web site I look at thrives on apocalyptic ads predicting the dollar's demise, which would certainly lead to higher commodity prices and would likely fuel more general inflation.
In The Little Book of the Shrinking Dollar, author Addison Wiggin makes the preposterous claim that "every paper currency in the history of civilization has eventually lost its entire value." As one studies hyperinflation theory, alas, one has to wade through a lot of raw sewage like this.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Mainstream worrywarts. But not everyone banging the hyperinflation drum is a crackpot. Famed hedge fund managers Nassim Taleb and John Paulson have established funds that would benefit from hyperinflation. Baupost Group's Seth Klarman, one of the best investors ever, thinks hyperinflation in the U.S. is a possibility. In 2010, he told Jason Zweig of the Wall Street Journal, "I worry now that a new element has been introduced into the game, which is, in effect, Will the dollars we make be worth anything?…It's not clear that any currency is actually all that trustworthy." Klarman's solution: Buy gold, gold-mining stocks and long-term options that will appreciate as interest rates surge.
Although Klarman thinks hyperinflation is unlikely, he warns against complacency. That's because he thinks government figures dramatically understate the inflation rate. Moreover, he reminds investors that things can go south in a hurry.
My biggest complaint about the hyperinflationists is that many ignore history. Printing a lot of money does not by itself produce hyperinflation, as James Montier points out in an outstanding paper, "Hyperinflations, Hysteria, and False Memories," that he wrote for money manager GMO. If running the government printing press in the wee hours were the whole problem, we'd see hyperinflation all the time—and we don't. It takes an enormous shock to trigger runaway inflation, such as a war or a general economic collapse.
Worst cases. Many people think the worst hyperinflation of the 20th century occurred in Germany's Weimar Republic after World War I. They're wrong. It actually occurred in Hungary after World War II, when prices rose at the equivalent of 207% per day in July 1946, when inflation was at its peak. The problem? The war destroyed half of Hungary's industrial capacity and damaged almost all of the rest. In addition, the Russians extracted huge war reparations. The second-worst hyperinflation in modern times occurred in Zimbabwe after a disastrous drought and ill-conceived land reform. Inflation raged at 98% a day in mid November 2008, and the world was introduced to its first $100 trillion bill.
Well, if it takes a shock and not merely printing money to produce hyperinflation, what could cause it today? The breakup of the euro zone would be the most likely culprit, speculates Montier. Star U.K. hedge fund manager Hugh Hendry says hyperinflation could result from a European disaster that would trigger deflation first and then hyperinflation as politicians tried to cure the deflation.
Am I petrified? No, but my research did lead me to ask a question: Why don't I own any gold? Pretty soon I think I will.
Columnist Andrew Feinberg manages a New York City–based hedge fund called CJA Partners.
-
Stocks Slip to Start Fed Week: Stock Market TodayWhile a rate cut is widely expected this week, uncertainty is building around the Fed's future plans for monetary policy.
-
December Fed Meeting: Live Updates and CommentaryThe December Fed meeting is one of the last key economic events of 2025, with Wall Street closely watching what Chair Powell & Co. will do about interest rates.
-
This Is Why Investors Shouldn't Romanticize BitcoinInvestors should treat bitcoin as the high-risk asset it is. A look at the data indicates a small portfolio allocation for most investors would be the safest.
-
What Fed Rate Cuts Mean For Fixed-Income InvestorsThe Fed's rate-cutting campaign has the fixed-income market set for an encore of Q4 2024.
-
Shoppers Hit the Brakes on EV Purchases After Tax Credits ExpireThe Letter Electric cars are here to stay, but they'll have to compete harder to get shoppers interested without the federal tax credit.
-
The Economy on a Knife's EdgeThe Letter GDP is growing, but employers have all but stopped hiring as they watch how the trade war plays out.
-
Japan Enters a New Era of Risk and ReformThe Kiplinger Letter Japan has entered a pivotal moment in its economic history, undertaking ambitious policy and structural reforms to escape from decades of stagnation.
-
After Years of Stagnant Growth, Hope Emerges for EU EconomyThe Kiplinger Letter Can a German fiscal push outweigh French political peril?
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
The Final Countdown for Retirees with Investment IncomeRetirement Tax Don’t assume Social Security withholding is enough. Some retirement income may require a quarterly estimated tax payment by the September 15 deadline.
-
Trump's Economic InterventionThe Kiplinger Letter What to Make of Washington's Increasingly Hands-On Approach to Big Business
