What happens in a hyperinflation?

Every time the Congress fails to balance the budget or the Fed fires up the presses, the value of the dollar goes down.  What happens when no one wants FRNs anymore?

Hyperinflation.

It’s a much misunderstood term. It’s not simply  really, really bad inflation.  It’s means people have lost any confidence in the value of their paper money. It happens when powerful people trade their deflating assets in for loads of freshly printed cash.  That way they get to spend it before its worthless.  Of course, the money doesn’t trickle down to you until after there done transferring their wealth into something of real value: gold, farms, oil, etc. By the time the money is in your hands, it’s buying power has already been used up.

Trading trash for cash isn’t an economic law. It’s just powerful people taking care of themselves –  otherwise known as politics.  Don’t get hung up on supply and demand equations or get stuck thinking like an economist. Think like a political scientist or a sociologist. It’s just rich and powerful people doing what they’ve always done: inflating and deflating the currency to their own benefit.

When debt overwhelms the system and leverage collapses under its own weight, they know it’s time for a new system. Time to trade trash (MBS, CDS derivatives, etc.) for freshly printed cash. Of course they have to spend the cash on real stuff quickly, before purchasing power drops and prices escalate.  They don’t worry so much, because their first in line for the cash when it’s still worth something.

So what happens when a dollar dies?

  • Stock market depreciate in real terms (although in nominal terms it goes up, up, up)
  • Banks don’t lend money, because assets (and therefore collateral) are falling in price
  • Massive price inflation due to depreciation of the dollar’s buying power:  especially food, gas, clothing cost much more

We’ve seen quite a bit of the above already. Next might be:

  • Nationalization (government stealing) of saving accounts, IRAs, 401ks, etc.
  • capital controls (laws that limit money from leaving the country)
  • More unemployment
  • Decline in government services such as trash pickup, fire, police, road repair, prisons, medical care etc.
  • Strikes, riots, crime waves
  • Black-outs of heat and electricity
  • Martial law

In general, the government and other rich, powerful people become much more interested in their own survival, not necessarily yours.

Sounds fun doesn’t it?

Good Read: When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany

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