Is hyperinflation imminent?
In June 2020 I wrote an article titled “Once Inflation Starts, it Won´t be Contained” which contained three theses:
1- Inflationary risks were a lot higher than generally perceived. The unparalleled increase in M2 money supply resulting from the response to the pandemic would lead to CPI inflation.
2- Once inflation starts, central banks around the world would be unable and unwilling to contain it by raising interest rates due to the extreme levels of public and private debt. Furthermore, the very action of raising rates to preserve the purchasing power of fiat currencies would render themselves themselves insolvents due to the maturity mismatching of the assets and liabilities on their balance sheet.
3- The inevitable outcome of such circumstances would be the repudiation of state issued liabilities (fiat currencies and government bonds) and a move towards hyperbitcoinization.
Over the past 18 months, events have unfolded in a manner that fits well with the framework presented in the article. In the following lines, I will revisit each of the above-mentioned premises, I will put special emphasis on the last assertion, which after giving it much thought has been somewhat revised.
1- Inflationary risks were a lot higher than generally perceive.
In the article I claimed that the massive increase in M2 money supply has head to a sharp increase in inflation. Google searches for inflation have also increased considerably and the mainstream media has started covering the topic closely.
2- Once inflation starts, central banks around the world will be unable and unwilling to contain it by raising interest rates.
As was anticipated, central banks haven´t taken action to contain inflation, i.e. consumer price increases haven´t been followed by higher interest rates. At present the 10 year bond is yielding less than 2% whilst inflation is spiking above 5%, in other words, under present conditions bond holders are losing 3% purchasing power per annum.
It appears that the scenario presented back in 2020 is materializing itself and central bank´s are trapped in a rather thorny situation:
All of which takes us to the final premise of the article: given that it is impossible for central banks to raise rates to preserve the purchasing power of fiat currencies, is a loss of trust imminent? Is the collapse of fiat money inevitable?
3- The inevitable outcome of such circumstances would be the repudiation of state issued liabilities (fiat currencies and government bonds) and a move towards hyperbitcoinization.
Since writing the article, I have somewhat refined my framework to include a variable which could help keep the fiat monetary system afloat: I am talking about a sharp increase in productivity.
The main issue with the current system that prevents central banks from containing inflation is the extreme amount of debt in the system. Public and Private debt to GDP at are levels that are completely unsustainable.
One way to reduce the Debt/GDP ratio is to print money and produce a nominal increase in GDP. This is what central banks are currently doing, however this action undermines the trust and value of fiat currencies which could lead to a vicious cycle of inflation expectations that leads to hyperinflation.
The Debt/GDP can also be reduced by real economic growth caused by technological revolutions. In a recent interview with Luke Gromen on The Investors Podcast, Luke, talking about the sustainability of the fiat monetary system makes the point “The only way it is recoverable is with the equivalent of some revolutionary enhancing technology in line with nuclear fusion portable in our backyard within 1 year…”(minute 58:14). Luke seems to make this claim in a somewhat dismissive but I believe there might be more to his assertion that what his tone conveys.
After much pondering over the matter, I believe we have entered such a revolutionary age. The research of ARK Cathie Wood shows 5 innovation platform that, according to their research, will deliver the period of most extraordinary growth in human history.
I agree with researchers at ARK, the above innovation platforms could lead to a near future with unfathomable increases in real productivity. For Example:
- Bitcoin will bring a global currency that will increase economic efficiency and global coordination hugely. Decentralized finance built on Bitcoin sidechains such as RSK and Liquid will create global capital markets with no boarders allowing for greater capital allocation efficiency,
- Artificial Intelligence and Robotics will increase output geometrically leading to huge GDP growth.
- Energy Storage will allow for full renewable energy integration, solar PV is already the cheapest source of energy and will be ubiquitous once cheap storage is available.
- Genome sequencing will cure many of today´s chronic diseases reducing the % of GDP spent on healthcare and increasing longevity, life expectancy and overall productivity.
If we see the geopolitical stability necessary for these technologies to flourish, I believe we will witness enormous GDP growth and Debt/GDP ratios will decrease my a mixture of money printing and growth. Regarding the sustainability of fiat money, the deflationary effect of these platforms could counteract the inflationary effect of money printing keeping the system in check. This is something that has been posed by other thinkers in the space such as Jeff Booth.
Conclusions
In conclusion, I still believe central banks are unable to contain inflation however, the mixture of capitalism and human ingenuity and new economic platforms could actually contain inflation.
If the 5 innovation platforms identified by ARK deliver the productivity increases that they promise, they could give place to unseen levels of economic growth that will help reduce Debt/GDP ratios. This real growth could lead to deflationary pressures that will counteract money printing inflation and help keep fiat currencies afloat for longer than some believe.
In a following article, I will present an analysis of the implications of such a scenario on the adoption of Bitcoin and it´s valuation.
