Start talking about Hyperinflation

Twitter CEO Jack Dorsey’s dire warning: ‘Hyperinflation’ will soon ‘change everything’ | Fox Business

Eugene Van Den Berg, Oct 2021

Is the risk for Hyperinflation real? Or, is it merely a feeling combined with a “word” that comes to mind? I’ll give you that much, I grew up with- and have seen high levels of inflation, but not Hyperinflation. For some, the rise of inflation to above ~4% in Canada and the USA compared to inflation targets set by the Bank of Canada and the Federal Reserve, at around ~2%, is very overwhelming. Especially folks that have been born after the middle 1990s. The rise in inflation over the past few months translates into a ~100% increase in a very short space of time. It is indeed overwhelming.

To talk about Hyperinflation, we need to start observing economies moving towards month-over-month inflation of ~50% (some background on Hyperinflation). Given the rise in inflation since May of 2021, it’s not likely to happen anytime soon. Could we get there gradually? Perhaps, but not likely given the reasons cited that is driven by technology to keep rising costs down, and creative destruction. I’ll add a few extra points to that, to consider: The changing world from being a totally industrialized economy transforming into a services economy and the gig-economy, jobs that were in demand some 30 to 40-years ago are making way for technology-services and technology-serving related jobs.

Recently I needed to assist my younger son to make flight changes. We held on the phone line for a long long time to be connected with a booking agent. We decided to drive to the airport to go to the airline’s ticket booth. We arrived only to learn, that to effect flight changes, one has no other option other than to call; or if the ticket was booked with the ability to make changes, then make those changes online. It got me thinking, technology and the internet removed a services channel and replaced it with a different type of services channel. That is the kind of development that keeps costs down.

Let’s review Money supply as measured by M3 and M2. Other measures include M0. M2 is still used by central banks and economists but the emphasis on measuring money supply from different levels was modified over the years evolving from M0, M1 to M2, M3 and now MZ.

Investopedia defines the various Money Supply measures as:

“M0: Physical paper and coin currency in circulation, plus bank reserves held by the central bank also known as the monetary base M1: All of M0, plus traveler’s checks and demand deposits. M2: All of M1, money market shares, and savings deposits. M3 is a measure of the money supply that includes M2 as well as large-time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets. M3 is traditionally used by economists to estimate the entire money supply within an economy, and used by governments to direct policy and control inflation over medium and long-term periods. As a measure of money supply, M3 has largely been replaced by Money Zero Maturity (MZM). MZM, which represents all money that is readily available, is a measure of the liquid money supply within an economy. It includes money as cash in hand or money in a checking account, for example.

M2 Money supply for the USA and China reflecting the start of the Covid19 Pandemic:


M2 supply for the USA and China as of July 2021:

M2 Money supply has grown approx. 13.79% in ~18-months in the US and ~32.32% in China over the same period.

To get a clearer picture of the potential risks attached to Hyperinflation long-term long-range economic data is required to plot money supply against inflation trends to make more meaningful assumptions.  A good proxy would be the use of the data as it pertains to the USA and China given that they compromise the bulk of the global economic output.

The growth percentages will have an effect on inflation for some time.,as they represent steep growth numbers over a short period of time. Safe to say that transitory inflation arguments, which I have been writing a lot about, do not hold water.

Since 2008, Monetary Policy Management and how it intersects with the economy changed a lot with the introduction of Quantitative Easing (QE) and the advancement of Modern Monetary Theory as the two are connected.

QE in its simplest form means:

“quan·ti·ta·tive eas·ing; /ˌkwän(t)əˌtādiv ˈēziNG/



the introduction of new money into the money supply by a central bank”

QE has come modern-day money supply instruments at the wholesale capital market level. It involves the Central Bank purchasing government bonds from investors and banks to exchange the bonds for cash. It has expanded to practices of purchasing bonds other than government bonds. It is another method of injecting liquid cash into the financial system to stem the risk of liquidity risks. QE does not show up directly in the Money Supply. However, as it works its way through to the cash part of the Money Supply, it eventually does get recorded in money supply numbers. One would want to consider what QE looked like before Covid19 and where it is currently.

I am intrigued by the fact that QE bond-buying causes yields to go down (inverse relationship between yield and price: – see Fabozzi’s works on Fixed Income – someones’ works I have come to love, appreciate and digest to its fullest in my postgraduate studies in Investment Management)

This would mean as the bond-buying continues the fair value on the central bank’s balance sheet appreciates. What happens when bond yields rise in reaction to concerns about inflation? The fair value of these bonds do down. as long as previously booked unrealized fair value gains and unrealized fair value losses, on a cumulative basis cancels out, or the economic stimulus ignites new economic growth, the risks of huge net-realized losses are lower. But what if we hit stagflation? Or persistent inflation at higher levels?

One would need to go back to the 1970s and derive how effective policy of the past can be combined with “modern-day money printing” to tame the inflation beast.

QE ran up trillions of dollars since January 2020. The amount of QE is approx. equal the deficit ran up by the Canadian Federal government in 2020 as ~CAD 350 billion of asset purchases through QE was made by the Bank of Canada. The Canadian deficit for 2020/2021 swelled by CAD 314 billion as reported by Reuters

In the USA, the situation is not much better. In 2020 and 2021 combined the total amount spent on asset purchases in QE amounts to ~$4 trillion and the deficits combined for both years amounts to approx. $5.9 trillion.

Hyperinflation is generally seen as a consequence of government ineptitude and fiscal irresponsibility.

It is very evident that Covid19 stimulus spending drove and is still driving deficit spending, thus giving meaning to “a consequence of government ineptitude and fiscal irresponsibility“. The proof in the pudding lies in how fast the QE can be reeled in as a break for likely high inflation? Time will tell I believe.

On, Oct, 25, Bloomberg wrote in “Five Things You Need To Know to Start Your Day”

“Over the weekend, Twitter CEO Jack Dorsey said that hyperinflation is happening and that it’s going to change everything. Of course, nobody really knows what he meant or why he said it. One guess is that he’s long Bitcoin and it’s a good thing to tweet for pumping his bags. Who knows. Also tech types seem to be obsessed with the dollar and monetary policy these days for reasons that aren’t clear.  Obviously the U.S. is seeing inflation these days that’s been higher than in the past, but it’s hardly hyper. But then someone will point out this chart of the so-called money supply (or some variant) as their trump card, and show that yes, there really is hyperinflation happening already.

relates to Five Things You Need to Know to Start Your Day

Fans of Austrian economics, in particular, are fond of this definition of inflation, that it’s not about the price of goods, per se, but the volume of dollars. But anytime I see a chart purporting to show an amount of dollars, my thought is always the same “who cares?”. The only reason we should care about any of this stuff is if prices are rapidly getting more expensive. If suddenly there were a huge increase in dollars everywhere, but prices didn’t move much, it wouldn’t matter. If the price of bread went nuts, it would be very bad. So a chart of the money supply tells us nothing that the inflation chart itself doesn’t. And yes, there’s no denying that inflation itself has been elevated relative to recent history, but again it’s not hyper, and really it’s not that wild if you zoom out even just a little.

relates to Five Things You Need to Know to Start Your Day

The year-on-year change in headline CPI remains nowhere close to what we saw in the 1970s, and there were even times throughout the 80s where the numbers were higher. Speaking of the 70s, on the latest Odd Lots, we spoke with Dan Alpert, a managing partner at Westwood Capital, and the author of a new paper that attempts to debunk the idea that a 70s-style inflationary spiral is coming anytime soon. As he sees it, quantitative ideas about money (such as the one above) have been debunked, and there remains plenty of actual capacity in the economy (domestically and abroad). All the bottlenecks and sources of pressure are in the moving of goods, he says, rather than their actual production.”

Then in another Bloomberg article, Cathay Wood, is of the view that deflationary forces will eclipse supply. Bloomberg writes: Cathie Wood Tells Jack Dorsey Deflationary Forces Will Eclipse Supply-Chain Havoc:

“Deflationary forces will overcome the supply-chain induced price pressures buffeting the world economy, Ark Investment Management LLC founder Cathie Wood said in a tweet after a Jack Dorsey post on hyperinflation. “Three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy,” Wood said in a thread Monday. She was replying to an Oct. 23 post from Twitter Inc. chief executive Dorsey proclaiming hyperinflation “is going to change everything” and is “happening.”

The three sources of deflation Wood flagged are:

    • The impact of technological advances like artificial intelligence.
    • Creative destruction from disruptive innovation pushes down the price of obsolete goods.
    • Cyclical factors due to the pandemic whereby firms ramped up orders to meet reviving demand and will eventually be left with excess supply and unwinding prices after the holiday season.

Enduring supply-chain snarls are stoking inflation expectations and shaking up markets. Higher Treasury yields have led to questions about whether valuations for the kind of technology investments Wood is identified with are too stretched. The flagship Ark Innovation ETF is down 25% from a February peak.”