Hyperinflation Following Mega-Deflation? Maybe, Maybe Not…

An acquaintance recently critiqued a post I made on a Finance forum recently about low-probability of Hyperinflation. Instead, they said that a kind of “severe” Deflation is far more likely.

For the scope of their reply – that is “What is next?” – I must agree…how economies of the world with “large”, system controlling and degrading debt-loads can avoid a severe deflationary turn NEXT is beyond me…

For, in my opinion, two “opposing” forces (such as inflation and deflation) CAN and indeed DO co-exist, and we would see this at a Macro-Economic level as a “net” (residual) figure, of either net deflation or net inflation: formally this simultaneous co-existance of Deflation and Inflation is termed Biflation. Kind of like how your house price and your favourite fashion label price can be deflating, but your grocery bill can be increasing week-to-week…there’s a net result for the economy. Normal, really, but it just gets “nastier” when things start to get “unstable” and unsustainable, and inflation or deflation pressures can get out of control….which is sometimes a deserved correction…but that’s another post, isn’t it?!

Anyhow, it is possible that, despite even being in an deflationary phase, an economy can quickly enter an inflationary phase – and even a “high” inflation phase. As deflationary pressures subside or reduce and/or even if already existent inflationary pressures increase, net deflation can become net inflation; the turnaround can be made even more rapid if an additional inflationary pressure is introduced….and, I guess that the converse is also true: if an additional deflationary pressure is introduced, deflation rates could increase. It’s all just a net balance, yes?

Anyhow, just consider now a post-mega-deflationary event adds additional inflationary elements to an economy…say, such as a population partially or even largely losing confidence in its central bank and government and their associated paper (“fiat”) money – this is important: if you don’t think your paper money is as “trustworthy” or “worth it” as a carrier of value (what it’s supposed to do!), then you will want more to cover yourself, or you will look to other forms of currency and trade – say gold, silver, a “more stable” foreign currency, or even bartering. And this is without mentioning something else like government and private debt-monetisation (conversion of debt to “real” money)…what about panicky liquidation of indebted assets during another deflationary period, eh, such as “getting the heck out of” housing, leveraged shares or derivates, etc, etc, etc? Hmmm…

That is, post-mega-deflation could, quite possibly, exacerbate underlying inflationary pressures (such as the above examples), and turn “normal” – even manageable deflation -period debt-feedback inflation – into “high” and even “hyper” inflation. This is even more exaccerbated in a global mega-deflation downturn, where just about everyone is affected. Quite simply, in such a scenario, there is “nowhere to go”…nowhere to run…nowhere else to “shift” the problem.

So, to summarise…

In the Bear Camp, the debate between the Inflationists and Deflationists, as to “what is next?”, continues. In my view, deflation probably will be “next” for the world’s economies (present for some!), but this does not discount a turnaround in the “flation” direction – even a quick swing – to net inflation, even high, even “hyper” inflation, following a mega-deflationary period…perhaps even exacerbated by the very fact that said deflationary downturn was “so severe” by historical standards…a deflation that I see as hard to avoid, unfortunately…

Hence, Deflation next, sure…but then probably high Inflation, possibly even hyper-inflation, made worse than “normal” by the deflationary context. I don’t want to say that post-deflation hyper-inflation is inevitable, but wanted to put forward a case in advance for its appearance.

Anyhow, ’nuff said about that…hopefully I made myself clear without being too verbose again! πŸ˜‰

Regards,

Stewart

PS…below is my actual response on the forum, if you are interested!

[acquaintance name]

I think i hear what you’re saying.

However, i think there is another issue to consider, and one that could become an issue is a severe deflationary scenario caused by debt-collapse, with near-zero Central Bank interest rates, money printing and debt monetisation…

…and that is a loss of confidence in fiat money itself, and i don’t see that covered in the response from Steve’s Keen’s blog. Specifically, i mean a population’s confidence in their fiat-currency (AUD, USD, Euro, or whatever…); even partial loss of confidence (ie. psychlological root cause) can tip off (domino style) a mechanical/systematic chain of inflationary pressures.

Truth is, i think “high” (ie. above CB band) inflation is ALREADY occurring in a number of areas of the global economy, even the Australian economy, due to large Debt Feedback mechanisms….it’s just that the deflationary threats and pressures in the Aussie economy – and especially in many other international economies – far outweigh the simultaneously occurring inflationary pressures.

I am saying that i think the two are happening simultaneously, and even significantly, in just about all international economies that have large debt-loads, or are “considerably” exposed to other economies that have large debt-loads.

That is, many economies are just NET inflation currently (eg. Australia), or NET deflation currently (eg. USA, Eurozone)

But once deflation has done most of what it can do, and even just starts to slow its rate of deflationary-destruction (where we might see NET inflation/deflation approaching zero!), I would expect the underlying inflation to start rearing it ugly head in a “surprising way”, and probably be exaccerbated by post-mega-deflationary pressures and mechanisms (such as mentioned earlier in my post).

The THEN NET result, in my honest opinion, would be “high” inflation in the short to medium term, which, if not heavily addressed, could go hyper.

Ahhh…felt good to finally write that down 

Stewart

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2 Responses to Hyperinflation Following Mega-Deflation? Maybe, Maybe Not…

  1. Cameron says:

    I would argue that deflation comes first, and if government decides that is a problem and aggressively increases the money supply, this could lead to serious inflation once confidence returns. Kind of like a rubber band – pull back with a little inflation, take the pressure of by increasing the money supply (letting go). It never seems to just ease back to normal, but the rubber band flings across the room.

    For what it’s worth, that’s my thoughts. Inflation will only be the result of government response to the crisis.

    • processdude says:

      That’s a fair point, Cameron (Murray?).

      My POV is that a notion i have called “debt feedback” causes inflationary PRICES pressure, which in turn then, eventually, expands the money supply (ie. inflation of the money base).

      The idea is that this debt-feedback-related inflation exaccerbates the debt-stressed economy, helping to “cap out” (max) the economy’s ability to continue to absorb debt, which then turns to debt-deflation.

      Then, debt-deflation significantly culls the over-producing and over-consuming economy; however, such that a still reasonably indebted economy, now “recovering” is now realising that heavy government intervention (debt and money printing) has assisted to reduce the term of debt-deflation, and quickly turns into high inflation……and if population confidence erodes too quickly and signficantly, the velocity of money could increase, and high inflation could turn into hyper-inflation.

      My personal belief is actually that hyper won’t occur, only “high”, as the govt will finally wise up and put up interest rates, and just accept a “slower” recovery from debt-deflation.

      (takes a breath)

      Anyhow, my debt-feedback idea is a process/systems/control engineering notion from my own area of expertise (process engineering, particularly mineral processing).

      It has some similarities to some (rare) things i’ve read on the net. You MAY recognise/be familiar with it as a positive feedback loop arising from accumulations of a quantity (in this case debt) that, in increasing their accumulation, begin to alter the system they exist in, and characterise it according to themselves. A “takeover” if you like”.

      It’s a process-control perspective on economics, if you like: “high” levels of debt eventually increase inflation, catalysing and increasing the severity of subsequent debt-deflation.

      This sort of positive feedback is seen in process and control engineering all the time; very common. I just noticed similar things in various notions of how debt-laden entities and economies function.

      I’m actually currently trying to develop a very basic flowsheet description, and subsequent mathematical description, to illustrate what i’m talking about. I may eventually post it here. Here’s hoping, eh?

      My views on the then subsequent “high inflation” (which i think will reduce the net severity and duration of debt-deflation) are somewhat separate and less developed, particularly as debt would no longer be as “characterising” or “controlling” for the system.

      hmmm…i guess what i’ve said perhaps has some more relevance to my “little” article on interest rates (https://anglesoneconomics.wordpress.com/2010/07/24/so-where-will-interest-rates-go-now/). As would be my little “very, very simple economy toy” i’m putting together in MS Excel, to show what i’ve been talking about in this article – ie. inflation and deflation occurring simultaneously in differently parts of the economy, and consequently reducing the magnitude of the whole economy’s net deflationary or net inflationary result. Anyhow, another project πŸ˜›

      Ah, now i will breathe.

      Thanks for taking the time to visit.

      Cheers,
      Stewart

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