Is Hyper-Inflation that Destroys a Currency a "Solution"?

When predicting the future, we’re best served by following “what benefits the wealthy and powerful,” as that is the likeliest outcome.

This contrarian sees a strong consensus around the notion that hyper-inflation is the inevitable end-game of nation-states / central banks issuing fiat currencies, i.e. currencies that are not restrained by being pegged to tangible assets such as gold reserves. The temptation to issue (via “printing” or borrowing new currency into existence by selling sovereign bonds) more currency becomes irresistible to politicians and central bankers alike. as the means to mollify every constituency, from elites to the military to commoners dependent on state-funded bread and circuses.

The Bitcoin Standard: ... Saifedean Ammous Best Price: $17.32 Buy New $18.78 (as of 10:45 UTC - Details) This unrestrained creation of new money far in excess of the expansion of goods and services (i.e. the real economy) devalues the currency, as “all the new money chases too few goods and services.” Gresham’s law kicks in–bad money drives good money out of circulation–as precious metals, fine art, gemstones, etc. are hoarded and the depreciating currency is spent as fast as possible before its purchasing power declines even further.

The Cotillion Effect also kicks in: those closest to the spigot of new money get first dibs on converting the depreciating currency into tangible goods, leaving the non-elites to sweep up the “trickle-down” shreds left as the currency loses purchasing power daily.

The consensus holds that there is no way to stop this decay of purchasing power to near-zero, i.e. hyper-inflation, once it starts. As in a Greek tragedy, the fatal flaw of the protagonist–in this case, fiat currency–leads inevitably to its destruction.

In the real world, things having to do with money tend to occur because they benefit powerful interests. This leads us to ask of hyper-inflation: cui bono, to whose benefit? Exactly which powerful interests benefit when a currency’s purchasing power plummets to near-zero?

The idea here is that there will be pushback if it doesn’t benefit the wealthy and powerful. So either hyper-inflation somehow benefits the wealthy and powerful, or it escapes their control and wipes them out along with the powerless commoners. That raises the question: didn’t the wealthy and powerful see what was coming and couldn’t they have reversed the policies generating hyper-inflation? If not, why not?

There are a couple of different threads to follow here. One is that capital is what matters to the wealthy and powerful because they own the vast majority of it while credit is what matters to the poor, as credit is their only way to acquire a bit of capital to invest in their own enterprise / household.

The poor owe debt, the wealthy own debt: debt (such as a home mortgage) is an asset to the wealthy, who buy the loan for its income stream, while debt is a liability to the commoners that must be serviced out of their earned income.

If wages rise in parallel with high rates of inflation, those who owe debt find their burdens lightened as their mortgage payment remains fixed while their income rises with inflation. Imagine how cheering it is when one finds a once-onerous $200,000 mortgage can now be paid off with a month’s salary due to hyper-inflation.

On the flip side, the wealthy and powerful who own the debt are less delighted, as the purchasing power of the currency used to pay off the mortgage has diminished, effectively robbing them of most of the value of their original purchase of the mortgage. Where the $200,000 they paid for the mortgage could have bought two nice luxury vehicles, the $200,00 they now receive in full payment can barely buy a used clunker.

This raises an interesting question: why on Earth would the wealthy and powerful let hyper-inflation destroy the value of all their debt-based assets and income streams? Isn’t that completely counter to their interests? If so, why would they let that happen?

At this juncture it’s important to draw a distinction between ancient examples of hyper-inflation and the present-day economy. In the declining era of the Roman Empire, the government drastically reduced the silver content in the coinage to generate the illusion that everyone was still being paid in full with only a fraction of the silver contained in old coinage. This artifice was quickly uncovered, and old coinage disappeared from circulation due to hoarding and inflation caused prices and wages to soar.

The difference is back then, the poor owned virtually nothing. Today, the poor “own” debt service: they owe interest and principal on the vast quantities of debt owned by the wealthy, who will lose out when the value of their debt-based assets crash to near-zero in hyper-inflation. Hyper-inflation is incredibly beneficial to debtors with earned income and incredibly destructive to those who own the debt being wiped out. Deflation and Liberty Hulsmann, Jorg Guido Best Price: $7.50 Buy New $5.95 (as of 03:41 UTC - Details)

This leads to a second thread: the wealthy shift their wealth overseas as inflation picks up, wait for the hyper-inflationary storm to wipe out the value of literally everything in their home economy, at which point they return, foreign cash in hand, to scoop up all the best assets at fire-sale prices.

This certainly works on small developing-world economies, but it doesn’t work in large economies such as the U.S. with $156 trillion in assets to convert into other nation’s currencies and assets. In large economies, the wealth of powerful elites is generated by a functioning economy that produces goods and services and maintains a stable currency. Buying a castle and some gold overseas is not a replacement for productive capital that generates income and capital gains.

Wiping out the value of the nation’s currency also destroys its value as a reserve currency and in global trade, two additional disasters the wealthy and powerful would seek to avoid at all costs. If we tote up the winners and losers of hyper-inflation, the commoners who owe debt win as long as wages rise with inflation, while the wealthy and powerful lose out. Given the vast asymmetry of wealth and power, do you really think this is going to happen?

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