Getting Hyperinflation Right
Dmitry Orlov
Profligate money printing by the US Federal Reserve and by other Western central banks has amounted to around $10 trillion over just the last year. The amount of currency in circulation has grown to $2 trillion, breaking a record set in 1945 and showing an almost 12% increase over 2019. The US federal budget deficit stands at just about $3.5 trillion, which is over 16% of GDP—the highest it's been since World War II. Meanwhile, the US federal debt has just topped $28 trillion. Over the past year the US has overspent its revenues by a staggering 194%.
Prices are going up everywhere even as the underlying economy remains in coronavirus-inspired doldrums, specifically because consumption has been repressed, with the coronavirus as an excuse, to delay the onset of hyperinflation. And then the Chairman of the Federal Reserve steps in and calms the troubled waters by publicly claiming that "There is no reason to be afraid of hyperinflation." This sounds a lot like denial, which is the first of the five stages of grief, after which come anger, bargaining, depression and acceptance. Powell said "hyperinflation"; therefore, there shall be hyperinflation.
What happens to the value of money when a government prints lots of it—to spend or to simply hand out to people—is that the money becomes less valuable because there is more money per unit things to buy with it. The expectation that this trend will continue then triggers a continuous process of increasing prices, called inflation, while the resulting expectation that the rate of inflation will continue to increase triggers hyperinflation.
My view is that hyperinflation is hardly a problem at all and that, quite the opposite, it is a solution to a great many pressing problems. Here we will look at hyperinflation as nature's gentle way of solving the problems of a society that has forgotten how to live within its means. But nature needs help. Just as a radical weight loss program can go better given some input from an expert nutritionist, hyperinflation too has its best practices, which I am eager to impart.
There are a lot of historical examples of hyperinflation. The most ancient one occurred on the Arabian peninsula after Emperor Mansa Musa I of the Malian Empire made his pilgrimage to Mecca in 1324, in the course of which he handed out 71,000 pounds of freshly mined Malian gold. Since gold's value is based on its scarcity, this rendered it all but worthless. But that is a unique case; all of the recent examples of hyperinflation featured piles of suddenly worthless paper money in ever more extravagant denominations.
This is most inconvenient from many perspectives. The sheer mechanics of hyperinflation—of printing and issuing ever more notes, repeatedly exchanging older, increasingly worthless notes for newer ones, making payments using cartloads and wagonloads of cash—become increasingly burdensome. When it takes an entire suitcase of cash to pay for a pack of cigarettes or a bar of soap, soap and cigarettes themselves become a makeshift form of currency.
Hyperinflation is most unpopular with people who insist on storing their savings in the form of cash. In response, they turn to buying up and hoarding other things, causing shortages and further driving up prices. But all of these problems can now be solved because we have the technology to make hyperinflation safe, comfortable, convenient and fun for the whole family!
However, this requires a change in mindset and a different approach to money. To start with, we need to recognize that money is not a physical quantity. It is dimensionless because it can only be measured relative to other currencies. Unlike any physical quantity, it is measured with infinite precision; any physical measurement, be it in kilograms, cubic meters or kilowatt-hours, has to have error bars on it to be meaningful, while monetary quantities, no matter how large, are precise down to the last penny. It is circularly defined: money derives its value from things that can be purchased with it, and these things in turn derive their price from the value of money.
Although money can be given a physical representation in the form of coins or paper currency, its essential nature is ephemeral, nonphysical and intangible. In essence, money only exists as pure thought in the minds of people who are involved in its exchange. Its physical embodiments are just theatrical props. Its reality is conceptual, similar to that of the irrational number π, which can also be given a physical representation—as, say, a one-meter-diameter circle carved in stone that has a circumference of π meters—but that would be pointless. Just as π is ubiquitous in mathematics, money is ubiquitous in economics.
Once we jettison the very idea of giving money any sort of physical representation, things become much simpler. Treating money as mere information to be represented as numbers within computer systems opens up all sorts of wonderful possibilities. To eliminate the physical representation of money while retaining its concept as a universal medium of exchange, it is necessary to shift to an all-digital currency.
To a large extent this is already happening. Most people have a smartphone, and many people link their bank accounts to payment systems that allow them to wave their phone at payment terminals without even having to touch them. This contactless method of payment is becoming increasingly popular and common in this contagion-obsessed age as people realize that cash is a major source of germs, passing as it does through many unwashed hands.
Physical cash has already become a legacy technology. It can be phased out simply by neglecting to upgrade it with higher-denomination bills while hyperinflation rages. By the time it takes an entire bulging wallet full of $100 bills just to gain admission to a public toilet, most people will take the hint and voluntarily switch to waving their smartphones around to pay for things. The annoying suitcase full of cash that is the linchpin of many a crappy film will thankfully become a thing of the past. Rich vulgarians who might previously light their cigars with $100 bills would perhaps switch to using something truly scarce, like toilet paper.
With physical cash gone, there still remains the problem of hyperinflation creating ever-larger numbers: millions, billions, trillions, quadrillions, quintillions, sextillions, septillions, octillions and so on. Here, expressing monetary quantities in scientific notation, with a mantissa and an exponent, makes hyperinflation much easier to handle computationally. The US federal debt, which has just surpassed $28 trillion, can be more compactly and flexibly expressed as $28E+12 with the 12 indicating that 12 zeros are to be added after the number. If it goes up by a factor of 1000 to $28 quadrillion that would make it $28E+15. Quintillion? No problem, $28E+18.
There are estimated to be between 1E+78 and 1E+82 atoms in the known, observable universe, but since money is not physical this is not a constraint. The only constraint is the ability of computer systems to represent very large exponents. The solution is to have the exponent wrap around. Once the lowest-denomination virtual coin reaches, say, $1E+100, the exponent wraps around and the redenominated value becomes $1E+1. Whenever that happens, a little green checkmark symbol would appear for a time on everyone's smartphone screens, with a hint: "Your favorite digital currency has been redenominated for your comfort and convenience."
Much more frequent than the periodic adjustments to the hyperinflationary currency itself will be the necessary adjustments to the prices charged for every product imaginable. Depending on the rate of hyperinflation, all prices need to be adjusted upwards on a regular basis—perhaps once a week, once a day, an hour or even once a second. To take maximum advantage of Everyday Higher Prices, software would need to be written to make it possible to automatically place an entire raft of previously set up orders the moment a sum of money lands in an account, to be able to lock in the lowest possible prices.
The software should make it possible to prioritize purchases, placing feminine hygiene products and diapers, prescription medicines, toilet paper and other outright necessities near the top of the list and luxuries (soft drinks and booze, chips and cookies, clothing and footwear) near the bottom, to be purchased only if the deposited funds turn out to be sufficient. In turn, the government would be able to harvest order history data and use it to set cut-off points between necessities and luxuries and to determine how much money to issue each month, each week or each day, aiming to provide all of the necessities and a few of the luxuries in an effort to keep hyperinflation under control and the population alive. Charitable organizations could use the list of necessities to determine what to distribute as humanitarian aid, since many people—the innumerate especially—might be unable to comprehend and navigate the wonderful new world of hyperinflation.
Such a system should be able to meet the goal of maintaining very high levels of hyperinflation for a considerable period of time. We should expect economics conferences to be convened to determine the best way to regulate hyperinflation. Mathematical theories would be hatched to calculate the optimum rate of hyperinflation, as has been done with inflation. No doubt great effort will also be invested in finding the proper, principled way to systematically underestimate hyperinflation, just as is being done with inflation today, with the help of hedonic adjustments and similar tricks, to make sure that the value of payments indexed to hyperinflation (for instance, government pensions and long-term contracts such as rental and lease agreements) decreases over time.
Perhaps this could be done by introducing Voluntary Simplicity Adjustments: if almost nobody heats or air conditions their house any more or has hot and cold running water, then the exorbitant cost of such luxuries would be excluded from the basket of goods and services used to measure the rate of hyperinflation. Similar reasoning could be used to exclude the cost of cars, bicycles, skateboards and shoes. A hedonic adjustment could also be applied throughout, based on the fact that people would enjoy a greater feeling of moral superiority from the fact that they are no longer having children and generally emitting less carbon dioxide, thus helping save the planet from catastrophic climate change (although it is by no means certain).
People tend to see inflation as a negative and hyperinflation as a calamity of highest order. This prejudice needs to be overcome with the help of proper messaging supported by ad campaigns and mass reeducation efforts. People must become appreciative of the fact that nothing in this world is permanent and that everything we have ages and fades over time, from yoghurt in your refrigerator to money in your wallet. Just as freshly baked bread is better than day-old bread, freshly issued money is better than day-old money. This is natural and in harmony with the rest of the universe, which is rushing headlong in the direction of increasing entropy. Regular visual redesigns, presenting each major new issuance of money as an exciting new virtual world, would not only keep designers busy but could help make month-old money seem as unfashionable and unattractive as month-old half-eaten pizza.
Hyperinflation makes it possible for the perceived values, and prices, to always go up even in the midst of economic malaise, decay and collapse. They may not keep up with hyperinflation, losing value in real terms, and this may be a problem in certain cases, but the major danger in a perpetually shrinking, depressed economy is deflation, especially asset deflation. The US is already experiencing it in a major way with free-falling prices for vacant commercial real estate. As the tourist industry shuts down, numerous assets, from cruise ships to passenger aircraft to hotels and resorts, turn into stranded assets that quickly run down due to lack of maintenance and become worthless except as scrap metal. But hyperinflation makes it possible for even the most stranded of assets to at least seem to keep their value. A rising hyperinflation creates the appearance of raising all boats, even the sunken ones.
Many people judge the health of the economy based on how stock prices are doing. At present stock prices are performing a most admirable levitation act in spite of a rapidly shrinking real economy. For example, industrial production in Germany, the industrial powerhouse of the EU, has been in continuous decline for the past 27 months, shrinking by more than 8%. In other news, according to the EIA, world oil production over the past year fell by an all-time record of 8%. It is admirable how Germany is keeping its industrial production synchronized with dwindling global energy availability, but that is hardly a reason for stock prices to remain as high as they are, never mind continue to go up.
At present, central banks in the US and in Europe are on the job continuously injecting liquidity into the various stock markets to keep them looking pink and plump, but such blatant intervention tends to make the stock market look like a pyramid scheme, undermining confidence. Hyperinflation can help: once it arrives, stock prices will continue to look pink and plump no matter what else happens. Of course, they won't be able to keep up with hyperinflation, but at least they will continue to go up, not down, instilling confidence in the economy, making stockholders feel happier than they would otherwise, creating a wealth effect that will help slow economic collapse.
With the choice of proper messaging and mass reeducation, it should be possible to inure people to the idea that money is no more durable than the things they buy with it, most of which are not durable at all and are often quite shoddy or outright disposable. After they get used to this new reality, they won't mind it too much, provided the user interfaces of the online banking and electronic payment apps are slick enough to make the work of dealing with Everyday Higher Prices easy, convenient and fun.
Handled properly, hyperinflation can provide numerous other benefits. Gone will be negative terms such as federal budget deficit and federal debt. Normalized over the past 12 months, the US federal government took in $283.8 billion in revenues and spent $552 billion. That is, it overspent its revenues by 194%. Rounding up just a bit, it is safe to say that the US spends twice its revenues, borrowing as much as it earns. The cumulative result of this borrowing currently stands somewhere north of $28 trillion and—here comes the interesting part—the amount of that debt that needs to be rolled over over the next 12 months comes to $7.4 trillion and has grown by $2.7 trillion (that is, by more than a third) in just the past year. Debt that can never be repaid is not really debt at all and continuing to call it that is psychologically damaging. Hyperinflation will make it go away, easing everyone's mind.
There are people who will tell you that this can go on forever because interest rates are close to 0% and so more debt can be produced out of nothing and existing debt rolled over ad infinitum with no adverse effects whatsoever. There are also people who will tell you that, given such an astoundingly huge levels of fiscal/monetary bloat, some of it will eventually leak into the real estate markets (indeed, it already has!), into the commodities markets, from there into the consumer goods sector, and then it will be off to the races! Just a whiff of hyperinflation will be enough to panic the bond investors, making it impossible for the government to continue rolling over its debt while borrowing ever more. Overspending its revenues by a factor of two is by no means an endpoint: the actual endpoint is a deficit of 100%.
It is time to abandon the outdated model of financing US government operations through taxation, which in the midst of hyperinflation will become ineffectual, since by the time the money is collected, allocated and spent it will buy next to nothing. A much better approach is to repeal all taxes and to retire the very concept of public debt. The US Treasury (not the Federal Reserve, which would become superfluous) would by then be directly issuing digital money in the quantities required—be they trillions, quadrillions, quintillions, sextillions, septillions or octillions of dollars a month, a week, a day, an hour or a second.
And then will come a brave new world in which the government issues money, hands it out, it circulates for a bit before losing of its value, and then the government issues more money. Obviously, the government, no longer being good for much, would do well to let the tech giants—Apple, Google, Microsoft, Facebook and, last but not least, Twitter—take over the money-issuing function. New smartphone-based banking and payment systems will not only make it possible to take these changes in stride but will make hyperinflation fun for everyone.
In this brave new world, gone will be the terrible problem of usury, since nobody will be willing to lend any money at all, at any rate of interest, there being a great danger of total loss. Gone will be the vexatious problems of attempting to exercise fiscal restraint and of having to justify to taxpayers how their tax money is being misappropriated and mishandled. The benefits of hyperinflation are too many to mention here, but perhaps the most important one will be in allowing people, rich and poor alike, to make a gradual transition to life without any money at all. To paraphrase Klaus Schwab, you will be broke and you will be miserable, but at least you'll have fun getting there... playing with your smartphone while waiting for deliveries... until the internet goes down... or the lights go out and the battery runs down.