A Few Words About Inflation

A lot of folks out there seem to be pretty worried about inflation, despite the fact that price levels have been flat for months and there's considerably slack in the economy. Some even manage to worry about hyperinflation, that is, extremely rapid and uncontrolled increase in the price level. This strikes me as extremely wrongheaded. It fails to place the current American debt-load in any kind of historical context, and more importantly, it posits a world where the Fed wouldn't respond to several years of double-digit annual inflation by raising interest rates. That's just not the world we live in.



And yet, people worry. Today, for instance, Hendy Blodget warns us to "Brace for Hyperinflation," and he cites a John Hussman report as evidence -- a report that looks to me like a great deal of hooey. Here's an example of what I mean:

This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade.

Scary red bolding entirely Hussman's. A near-doubling of the U.S. price level over the next decade is consistent not with 5% or 6% inflation, but with...7% annual inflation. To put the hyperinflation issue in context, Weimar Germany had a monthly rate of inflation of about 3,000,000% in 1923, and as of last November, Zimbabwe had an estimated monthly inflation rate of 13,000,000,000%. At these rates, prices double multiple times per day. An America with rates even close to these levels is one in which the nation's political institutions have all completely collapsed.