economically: Financial markets shut down, banks go under, capital leaves the country, supermarkets run out of multiple food items, many gas stations close, unemployment rises, and severe recessions begin. It is possible for a nation to recover economic and price stability relatively quickly with the assistance of international organizations like the International Monetary Fund, albeit at a new level far lower than before: The country’s standard of living has decreased, and it will take many years for wealth to return. One of the world’s leading experts on hyperinflation, Peter Bernholz is a professor of economics at the University of Basel in Switzerland.
His explanation for why it happens is clear: Hyperinflations are brought on by budget deficits in the government.”7 One thing is certain: A catastrophic economic event known as hyperinflation has never occurred without a significant budget deficit. Additionally, in each case of hyperinflation, the deficit exceeded 20% of public expenditures8. The reason for these nations’ demise is so simple that one need not have a PhD in economics: The governments of the countries listed in Table 2.1 ultimately decided to print money to pay their bills after exhausting all available revenue sources. This is how the countries in this terrible situation ended up. The value of goods, which became scarcer than the increasing number of currency notes and coins, began to rise rapidly as a result of the increase in money in circulation.
According to Bernholz, the public tries to spend the depreciating currency as quickly as possible, which causes inflation to accelerate. It should come as no surprise that rapidly rising inflation is extremely disruptive to the economy because it becomes increasingly difficult for creditors and businesspeople to provide credit and set prices for goods. And the repercussions for the financial markets are always severe. One could argue that the conditions are present for an eruption of hyperinflation in the United States, the United Kingdom, and Japan, countries that collectively account for almost half of global GDP, based on the graph lines in Figure 2.5, which show surging budget deficits for major economies.
In 2008, the global financial crisis led to a dramatic rise in deficits, which had already been substantial and growing. Take into consideration that the debt-to-GDP ratio of the United States government increased by a stunning 20 percentage points in a single year. In just four years, the national debt increased by 50%. Despite this, governments have been unable to provide a credible explanation for how deficits—not to mention trillions of dollars in debt—will be reduced in the years to come, especially when demographic challenges each nation faces are taken into consideration. Over the next ten years, especially in Japan, the pace of federal expenditures for a growing number of retirees will accelerate, implying an increase in federal spending. In addition, despite its size, the global sovereign bond market, which is worth tens of trillions of dollars, was not deep enough to handle the enormous amounts of bonds issued by the United States, the United Kingdom, and Japan.
As a result, central banks have had to absorb a sizeable portion of the issuance: The central banks of these nations printed money to purchase federal bonds. The fact that the major economies of the world have growing debt and deficits does not mean that hyperinflation is about to break out. Although UCLA Professor John Talbott wrote The Coming Crash in the Housing Market (McGraw Hill Professional) in 2003, there was no American real estate crash then. However, the conditions for the crash, which took three more years to occur, were certain: Incomes were growing much more quickly than home prices; Equity was being withdrawn by families in the billions; and market professionals, loan officers, and regulators were ignoring alarming signs. In the same way that massive global federal deficits provide the conditions for hyperinflation to emerge today, conditions existed for the housing market’s collapse. In order to avert a catastrophe caused by inflation, our leaders must either reduce spending or increase tax revenues. However, it is likely that investors will continue to move into inflationary insurance instruments like gold while we wait for governments to establish a credible path for deficit and debt reduction.