THE THREAT OF INFLATION 47advanced country such as Germany, but long ago. Perhaps
you think of grainy, black-and-white photos from the 1920s.
The last thing you probably think of is a hyperinflation in
a 21st-century developed economy such as the United States.
We tell ourselves that hyperinflation might happen in faraway
or long-ago places, but it can’t happen here.
Yet it can happen here. In fact, the United States flirted
with hyperinflation in the late 1970s, and before that in the
late 1910s. Other episodes arose after the Civil War and the
American Revolution. Hyperinflation acts like a deadly virus
with no cure. It may be contained for long periods of time, but
once it breaks out into a general population, there may be no
stopping it without enormous losses.
To explain why, it’s essential to know what hyperinflation
is, how it begins and how it feeds on itself. In a complex sys-
tem such as the U.S. economy, small initial blunders can have
catastrophic consequences once feedback loops and behavioral
changes take over.
There is no universally agreed-upon definition of hyper-
inflation. But one widely used benchmark says hyperinflation
exists when prices increase 50% or more in a single month. So
if gasoline is $3.00 per gallon in January, $4.50 per gallon in
February and $6.75 per gallon in March, and if prices of food
and other essentials are going up at the same pace, that would
be considered hyperinflationary.
It also tends to accelerate once it begins, so the monthly
50% increase soon becomes 100%, then 1,000%, etc., until
the real value of the currency is utterly destroyed. Beyond that
point, the currency ceases to function as currency and becomes
litter good only for wallpaper or starting fires.
Many investors assume that money printing by govern-
ments to cover deficits is the root cause of hyperinflation.
Money printing does contribute to hyperinflation, but it is not a
complete explanation. The other essential ingredient is velocity