Tune Out the Hyperinflation Hype. It’s Just Meme Economics
(Bloomberg Businessweek) -- We know from the past year that quite a few people inhabit alternate realities that float above the factual landscape like giant, impervious, untethered balloons. One unmoored balloon that’s reached enormous proportions recently is the specter of hyperinflation—the conviction that a reckless expansion in the money supply will trigger an endless cycle of currency depreciation and price hikes, turning the U.S. into the equivalent of Weimar Germany circa 1923, Zimbabwe circa 2020, or present-day Venezuela.
This is meme economics, so the underlying theory can be hard to pin down, but the general idea seems to be that the Federal Reserve is in league with dark forces—perhaps the Democratic Party—to destroy the nation and deliver … something. “Hyperinflation this summer will usher in the next wave of leftist authoritarianism. There will be asset seizures and capital outflow controls soon,” paul_revere2021_4 wrote recently on Reddit’s NoNewNormal forum. Images of Fed Chair Jerome Powell maniacally printing dollar bills are all over the internet. There’s even a website called moneyprintergobrrr.com, though you shouldn’t visit it if you’re troubled by recordings of people screaming in agony.
This wouldn’t matter except that conspiracy theories have an insidious way of seeping into the real world. Fear of inflation—if not outright hyperinflation—helps explain the meteoric rise of Bitcoin. It’s behind distrust of the Fed. And it feeds congressional opposition to President Biden’s $1.9 trillion pandemic relief plan.
Hyperinflated hyperinflationism isn’t emanating only from basement bloggers and Redditors. Paul Singer, the billionaire head of hedge fund Elliott Management Corp., wrote to investors last year that “hyperinflation, a rejection of fake money and fake-knowledgeable central bankers, is possibly lurking just out of sight.” Dick Morris, a onetime adviser to President Bill Clinton who later veered to the right, told the conservative Newsmax TV network on Feb. 8 that “the central reality of ’21 is going to be major, major inflation, hyperinflation.”
Hyperinflationistas affect the debate by providing cover to more circumspect but politically influential players such as Republican Senator Pat Toomey of Pennsylvania, who challenged Powell during the Fed chief’s testimony on Feb. 23. “We are seeing quite elevated asset prices and signs of inflation,” Toomey said, adding, “there are a lot of warning signs that are blinking yellow.”
Inflation, which in the U.S. peaked at just under 15% in 1980, has somehow become scarier during its long absence, like the monster in the basement. But back to reality: Hyperinflation is people carting around stacks of bills in wheelbarrows, central banks issuing new currency notes with multiple zeros lopped off, people hurrying to the cash register with food before prices go up again, retirement nest eggs being wiped out. It’s a societal disaster.
That’s not in the cards for the U.S. Hyperinflation is unofficially defined as an inflation rate of 50% or more a month. In contrast, consumer prices in the U.S. have been going up less than 2% a year since the 2007-09 recession. For the 12 months through January, the increase in the price index that the Fed tracks was just 1.5%, below the central bank’s target of 2%. In other words, the U.S. has a problem with inflation, all right, but the problem is that it’s too low, not too high.
Is inflation rising? A bit. Consumer prices were falling last spring, so comparisons this spring will be, ahem, inflated. As for the longer term, the bond market’s expectation of annual inflation over the next decade has shot up all the way to … 2.15%. You arrive at that number by subtracting the yield on inflation-protected 10-year Treasury notes from the yield on ordinary 10-year notes. Another measure, the median estimate of consumer price index inflation in the Survey of Professional Forecasters, is 2.2%. The professional forecasters who are surveyed expect the Fed’s preferred measure, which is the price index for personal consumption expenditures, to rise 2.03% a year through 2031—almost smack dab on the Fed’s target.
It’s conceivable that inflation will accelerate to 3%, 4%, or 5% for a while because of post-pandemic splurging and production bottlenecks, but the Fed has ways to halt inflation of that sort from snowballing into hyperinflation. The first step would be to stop buying long-term Treasuries and mortgage-backed securities, a move that would cause long-term interest rates to rise. The second would be to push up short-term interest rates—a lot if necessary.
Higher rates discourage borrowing, which constrains spending and investment. Suppressing growth is a crude but ultimately effective way of chilling inflation. Higher rates also lower the value of existing fixed-income securities, hence the squeals of pain you’re hearing from the bond market.
The real risk of inflation getting much above target isn’t that the U.S. becomes Venezuela but that the Fed overreacts and accidentally causes a recession. If the Fed steps in too late and the economy substantially overheats, “the likelihood is that something adverse will happen, and therefore it’s better not to do that experiment,” former Treasury Secretary Lawrence Summers said in a Princeton webinar on Feb. 12.
The chance of a problematic inflationary overshoot—not hyperinflation—is where reasonable people can disagree. Powell acknowledges that excessive inflation can’t be dismissed but emphasizes that it’s still below target and unemployment remains too high. “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said in prepared remarks to Congress in February.
Inflation is hard to predict because the expectations of consumers and businesses play a big role in it. To some degree, prices will go up if people think they will go up and won’t if they don’t think so. In a series of papers beginning in 1896, Irving Fisher argued that expectations of the future inflation rate are influenced by observations of the past inflation rate.
A working paper released in October demonstrates the importance of inflation expectations. It focuses on the early 1980s, when the Fed under Chairman Paul Volcker raised rates to as high as 20%, caused a deep recession, and wrung inflation out of the U.S. economy. Although states’ local unemployment rates were different, their inflation rates were similar. That’s an indication that their inflation was less affected by their economic conditions and more by expectations of future Fed policy, which affects all states equally, says one of the authors, Emi Nakamura, a professor at the University of California at Berkeley. “Fundamentally it’s a confidence game,” says Nakamura, who in 2019 won the John Bates Clark Medal for the best American economist under 40.
In a strange way, then, the hyperinflation talk does matter—because perception can become reality. The more Powell tries to reassure people that inflation isn’t a big problem, the more he alarms those who think he’s dangerously wrong. If that contagious meme spreads and inflation expectations start to float higher, Powell & Co. could be forced to raise rates prematurely, puncturing the inflation balloon at the cost of growth and jobs.
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