I was talking to a libertarian friend the other day who said that we would have hyperinflation in this country (the U.S.).  I said that I didn’t think it would happen here and we debated the topic.  I said that I would bet him 100 bucks that I would be right.  I figured that even if I was wrong, then I would be paying him 100 dollars that was basically worthless.

It is important to define hyperinflation.  Different people have different definitions.  Austrian free market economists talk about inflation as an increase in the money supply, which was originally the definition.  Most people today, when they talk about inflation, are referring to a general increase in prices.

The next question is what the “hyper” part means.  Does it mean an increase of 100% or more annually?  Does it mean an increase of 25% or more?  If someone says that hyperinflation means that prices will go up by 25% or more, then I wouldn’t disagree with them that hyperinflation is a good possibility.

My friend was defining hyperinflation as prices going up every day.  It means that when you receive a paycheck or other money, you will be running to the store to spend it on almost anything.  It means that the velocity of money is very high.

I don’t think this scenario is likely.  I think we will see massive inflation.  I think we may see prices going up 20% or 30% annually.  I think at that point, the Fed will pull back like it did in the late 1970’s and early 1980’s.  Bernanke is an elitist and a Keynesian, but he is not completely stupid.  I understand that hyperinflation has happened elsewhere.  I don’t think we are in the same position as Zimbabwe of a couple of years ago or 1920’s Germany.

You can never say never, but hyperinflation is not a high possibility in today’s world in the U.S.  The Fed cannot get away with things as easily now.  With the internet and the virtually free flow of information, there will be too many people that understand that the Fed and its increasing of the money supply is what leads to massively rising prices.

In addition, I don’t see why the Fed and bankers would allow this to happen.  They would be destroying themselves and the system that they built.  Gary North has made this point before.

When people talk of hyperinflation, I don’t know that they think through the ramifications.  If I thought it was coming here, I would be looking for another country to live in.  We have a high division of labor society.  We are not farmers like 1920’s Germany or 21st century Zimbabwe.  If hyperinflation happens, the trucks and trains will stop and there will not be food in your grocery store.  We are talking massive food shortages and riots.  You would not want to be here.

You should prepare your investments for a depreciating dollar.  You should expect 5 or 10 dollar per gallon gasoline in the next few years.  You should expect your grocery bill to double.  Let’s hope I’m wrong and it isn’t this bad.  If it is worse and we go to hyperinflation, don’t worry about your investments.  Worry about moving yourself to another side of the earth.

Merry Christmas to everyone!