In the first part of this series on hyperinflation I addressed the critic’s view that if Modern Monetary Theory were adopted, this would inevitably lead to hyperinflation. I argued that this is obviously false—MMT describes how any sovereign government that issues its own currency spends. They’ve all done it for the past “4000 years at least” as Keynes put it. All modern sovereign governments spend by “keystrokes”—making electronic entries onto balance sheets—what most critics somewhat misleadingly call “printing money”. There is no other way to spend a sovereign currency into existence. Only the sovereign government can create it. If you try to create US currency in your basement, you go to jail. In the second part, I argued that hyperinflation is a rare occurrence. Obviously, if “keystrokes” inevitably lead to hyperinflation, then hyperinflation ought to be a common feature of just about all economies for the past 4000 years. Instead, we find that experience with hyperinflation is quite limited, and seems to result from very specific circumstances such as unwillingness or inability to impose and collect taxes, with civil war, or with huge external debts denominated in a foreign currency. And while goldbugs and others think that tying a currency to gold (or to a foreign currency) is a sure-fire way to avoid inflation, what we actually observe in the real world is that such systems are inherently unstable and rarely last long before they crash—often with an exchange rate crisis and high or hyper-inflation.
In this final part of the series I will address the belief that the US (and other countries with large budget deficits in their own floating rate currency) faces hyperinflation. Many fear that “Helicopter Ben” (Chairman Bernanke) has pumped so much “money” into the economy that high inflation, if not hyperinflation, will be the inevitable result. This is one of the reasons for the run into gold—supposedly an inflation hedge.
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