John McLaughlin’s prediction on last week’s McLaughlin Group–that Japan would botch something economically somehow and cause widespread hyperinflation–intrigued me. Specifically, it got me wondering what hyperinflation would be like for ordinary people in this country.
Most descriptions talk about runs on food (and of course the obligatory recollection of images of burning bundles of money in the fireplace), but other than that they’re kind of abstract. I’m thinking of questions like, is there reason to think one wouldn’t have access to the internet anymore? Is my heat gonna get shut off? Drinking water, etc? On the up side, assuming the right banks fail my student loans will disappear, right?
Maybe this question belongs in IMHO. Incidentally, I’m not looking for arguments about why it won’t/can’t/will happen here and why/why not.
Based on what I know about Weimar Germany, 1930s Hungary, and Zimbabwe in the 2000s, all of which experienced hyperinflation making the currency worthless: In some combination, people revert to barter, begin using foreign currencies, or demand that the existing currency be cancelled and a new one introduced. In none of those places did society collapse as a direct result of hyperinflation. The main issue with extreme currency devaluation is that fixed contracts (I’ll pay you $50,000 to work for me for a year, I’ll pay you $200M in ten years to build my a hockey arena now) become pointless to comply with and need to be renegotiated, but ultimately a new currency is introduced at some ratio to the old one and life goes on. It’s not pleasant and it has the same effects as any other severe economic shock, but the idea that everyone will freeze to death or bands of marauders will roam the streets seizing babies as food is not supported by historical precedent.
I was at a talk once by a geologist who was investigating mining opportunities for his company in Russia in the early 90’s. He mentioned the story that people were paid every day at noon, and rushed out to buy whatever they could no matter how useless (i.e. a dozen T-shirts); by evening, their money was not worth as much. In the evening around the suburban metro stations, everyone was standing around holding up the items they had bought, looking to trade.
The supply chains break down. He was at a remote mining town in Siberia. In teh basements under the major buildings, the crawlspace above the permafrost had been turned into a black market. He said, you could find drugs, porn, women for sale, even children - but they could not find any orange juice. Anywhere, anyhow, any price.
Several stories from the news;
-food riots in Argentina a decade or two ago, when they started putting “pricers” in front of the supermarket checkout to re-price food as it was presented to the cashier. Supermarkets were looted and burned.
-the joke: what’s cheaper, a bus or a taxi? A: A taxi, becuase you don’t have to pay until the ride’s over. (When the money is worth a lot less).
-Weimar Germany, Nicaragua, and Zimbabwe are all famous for recalling money to print extra zeroes on the bills. When you can’t even afford to print more money, you know you’ve got it bad.
-The “wheelbarrow full of cash to buy a loaf of bread” is legendary about Weimar Germany.
What hurt most (see thread about “what’s fixed income?”) was the people of Russia who had life savings, and government pensions, that effectively were worthless within a few months. The government may have indexed some of the value, but generally took advantage of the problems to end up with a relatively smaller obligation. (Which sort of makes sense, over promising government payouts is what causes these problems, usually).
Not to hijack but…could I pay off all my debt and mortgage with the worthless money? I guess if the currency devalued enough I could pay off my mortgage for the price of a loaf of bread 
If a bank fails, your outstanding loan is an asset that will be sold to pay off creditors/depositors; your loan will not simply fall off of the books because the bank implodes.
The good news is that hyperinflation means your loan will soon become worthless. Since the price of goods is rising extremely rapidly, wages will rise correspondingly rapidly, but the dollar amount of your loan will not (and the interest rate is presumably fixed). This means that before long you’ll be able to pay off your $50,000 student loan with a week’s wages (because your annual salary will have risen to $2.6M, courtesy of hyperinflation). Wait a few more weeks, and you’ll be able to pay off your loan with just one day’s wages.
Hyperinflation is good for people who owe money, but it’s bad for people who are owed money, and bad for people who have savings.
Yes, that’s the problem with hyperinflation. Hyperinflation essentially means a free ride for debtors and a punch in the face for creditors. And that is why it happens, a government is a creditor and decides to devalue the currency so they can pay their debts with money that has the same nominal value but much lower real value.
And so the people who lent money to the government are screwed. And anyone with a fixed pension or savings account or money under the mattress are also screwed. It becomes impossible to borrow money or lend money, because money is no longer money.
That’s why I have a hard time understanding how hyperinflation can work. When it becomes clear that there really is hyperinflation, it seems to me that the money should be worthless. Not “I’ll take a billion dollars for this loaf of bread”, but “I won’t trade this loaf of bread for any amount of dollars, I’ll only trade it for something worth something.” Why would anyone take the currency under any circumstances? And even if you’re getting paid by the government in the worthless currency, why would you keep going to work when they pay you in scrap paper?
Part of this is they don’t sell as much but barter more. Part of it is they may be legally required to accept cash in some situations. Part of it is they charge extra for cash depending on how long they think it will be before they can spend it themselves, which further adds to the hyperinflation.
Well, they don’t, that’s the problem. Hyperinflation in the past has lasted at most two years, after which people stop using the currency entirely.
One story about Weimar Germany: Someone had a particularly valuable item that banks would accept as collateral. He’d go to one bank and get a loan for 1000 marks, due in one week. He’d spend the money, then take the item to another bank. They’d loan him 10,000 marks on the watch. He’d go to the first bank, pay off their loan (say, for 2000) and have 8,000 marks for the next week. The next week, he’d find a third bank, and get 50K marks for the watch, paying 25K to the second bank. He was able to go on for quite some time with that scheme.
Sounds like BS or someone’s Just So Tale, because the banks would understand this too. Either (a) law limited interest rates, so the banks would NOT lend money, if there’s no real profit. Or (b) the banks would loan, but with interest above the level of inflation. As a result, he’d take a loan on the watch for 25,000 marks. TO retreive it, he’d need 25,000 plus interest for a week, total 60,000 for a now 50,000 watch.
As I mentioned above, the guy said people would buy anything they could afford to get rid of cash and convert it into tradeable or resaleable goods ASAP. Holding cash during hyperinflation would be like having a pre-paid gift card that took a fee off the card every day.
Once people started to figure out that inflation was a problem, everything started to adjust. We saw this in North America in the 70’s. Union contracts have COLA clauses. Canada Savings Bonds, for example, stopped being fixed rate bonds and the government simply said “we will announce the interest rate each year”. If you get a mortgage, the nbanks published rates are a guess what the interest rates will be in the next 5 years (or whatever term).
People who are lucky signed for long-term debt before interest rates start rising. Then you car loan and mortgage are fixed, while your paycheque - if you still have one - spirals upawrds. When things start to get totally unpredictable, expect every bank and lender to offer only variable-rate interest loans. Of course, this works when inflation is just ridiculous - say 200% a year. When you get to the well-beyond-ridiculous 200%-a-week level, things pretty much break down. I imagine everyone just waits for the final melt-down.
Thanks for the replies so far.
In the case of those of us who’d enter this potential situation owing much more than we’re owed (e.g. big student loan debt), how is it that the bank falls for this?
So I owe $70,000 on my house to WellsFargo. Hyperinflation happens. Six months into it, $70,000 is, say, about a week’s pay. I find it hard to believe that when I stroll into my local WellsFargo branch with my paycheck and say, “I’d like to settle up on my mortgage” that they’re gonna take it sitting down. What prevents the bank from saying, “Yeah, you owed us $70,000 in pre-hyperinflation dollars; but you know what’s happened these last months as much as we do. You now actually owe us $700,000,000,000 on your mortgage.”
Furthermore, what incentive does my employer have to adjust my pay to post-HI dollars?
Is there something I’m missing?
Another Weimar Germany story, gleaned from documentary. The reason Weimar Germany became pretty much the center of European sex trade in the '30’s was because the one-two punch of hyperinflation and unemployment put huge numbers of people in the position of prostitution or starvation. Supposedly there were a large number of family clans that essentially just opened the family house as a brothel and everyone (or nearly everyone) joined in, offering variety as well as all the comforts of home to visiting sex tourists.
Note that I personally have not researched Weimar Germany more than very casually, so feel free to correct me.
Reply to whc:
I’m not an economist or a lawyer, but I suspect that your employer will have to raise your wages or else you won’t find it worth while coming to work each day and quit on him, and since indentured servitude is illegal he can’t do anything to stop you. As for the bank, you have a fixed contract with them that says you can pay off your debt at any time. So unless there is special legislation passed that amends all contracts in the face of the hyperinflation, they have to abide by the contract.
Your mortgage is a legal contract. The banks usually have more power to screw you using the letter of the contract but in this case, you would be the one to benefit and there isn’t anything they could do about it. The bank can’t just unilaterally make up new terms to an existing legal contract.
Your employer would need to adjust your pay during hyperinflation for the same reasons they adjust for inflation now. It would just need to be a much bigger and more urgent adjustment. If they don’t adjust it, they would start losing staff as employees became unhappy and quit to got to other companies. Without any pay adjustment, it may not be worth working at all under true hyperinflation without pay adjustments (e.g., you would not be able to pay for the gas to get to work).
I don’t think you are missing anything. I had a friend from Thailand who owed the Thai govt multiple 10s of thousands of dollars (measured in US dollars) for student loans in the US. She was fortunate in the sense that during the early, mid 90’s the Thai currency worked in her favor, and she was able to pay it off in a very short time (within months). The $40,000 (US dollars) owed, all the sudden became only 10,000 or 20,000.
I suppose the government could pass a law retroactively changing the terms of the student loan contracts. However, with the economy in a death spiral, odds are that’s not their most urgent problem. Plus, what’s the current precedent of the governments playing 800-pound-gorilla and rewrting contracts? I suspect they’d lose in court.
You employer, like anyone else with a business, will do what they can get away with. If your paycheque will buy a cup of coffee, why would you show up? They will likely raise your pay so you cn afford to show up to work and buy enough food to live, but it won’t guarantee you wouldn’t notice the difference - odds are it will be high enogh that you are better off showing up than not.
Note the Russian example - people were paid each day. An employer that does not match that, might also find a problem - why would I work today for money that’s not worth anything when I get it next Friday? But if he’s selling widgets, he will only get today’s prce for them, not next Friday’s…
Number one lesson of hyperinflation - the less time you hold on to money, the better off you are.
As you note, if this is a true story it’s really just an example of financial speculation. It’s no different than borrowing money to buy shares in Apple and then paying off the loan after the shares go up in price.
Another tale from Hyper-inflated Germany. A mega-businessman named Hugo Stinnes was allowed to borrow from the government at low, fixed rates. He promptly bought up most of the German steel industry, all of the shipping lines, and a lot of the coal mining firms. He paid back his loans in nearly worthless marks.
So hyperinflation benefits debtors, and penalizes savers. there is the story of a widow who retire with the equivalent of $800,000. She hoped to live off the income through her retirement-except he savings account was in marks. Three months later her account was worth less than 4 cents.
Is hyperinflation a one-way street? Once a loaf of bread costs $1000, and everybody is getting paid in the millions, how do you go back?