Home > Macro/Monetary Theory > Why are Austrians Obsessed with Hyperinflation?

Why are Austrians Obsessed with Hyperinflation?

In WordPress, next to your “top posts,” it tells you the top searches that led people to them.  Next to my recent post on monetary economics I noticed the following search: “why are Austrians obsessed with hyperinflation?”  So I tried that search to see what came up and guess who is number 1 (me)! However, the post that it links to is not all that enlightening by itself.  So I figured I would give the people what they want and just answer this question directly.

Austrians are obsessed with hyperinflation because they don’t get how money is created in this country.  And I am saying this as someone who is morally and philosophically sympathetic with them.  But they have a model of money creation in their minds which is not accurate.  They can only see a system where the government just prints money and spends it.  In this system, we would be in great danger of hyperinflation for exactly the reasons they say.  Namely, the tendency of the government to print and spend more and more money would cause the money supply to expand constantly driving the value of that money down until eventually people decide to flee the currency in anticipation of this drop in value and then the value starts to drop dramatically and this causes a rush for the exits and so on.  In this scenario, all the things they say are correct including the stuff about inflation being a stealth tax on people who hold money, and the notion that governments can “inflate away” their debt.  The problem is that this is not the system we actually have.

What we have is a central bank (the Federal Reserve) which prints money and lends it.  This is entirely different from just printing and spending.  Notice that they do buy things with the money but what they buy are government securities.  In other words, they buy debt, which is the same as lending it.  When the debt matures (or when they sell it) the money goes back to the Fed.  This is completely different from the system outlined above because every dollar created also creates a counterbalancing debt.  This means that the money they put out there isn’t just out there forever, it is like each dollar is really a boomerang which they throw out but eventually comes flying back to the Fed.

But since they lend it with interest, when it comes back, it is even bigger than when they threw it out in the first place.  And that additional money which comes back to them has to come from somewhere which means they have to constantly throw out more and more to keep the quantity out there large enough that it can flow back to them fast enough to retire the debt without upsetting the inflation expectations they have cultivated.  The way it breaks down is not with them printing too much money but rather with them not printing enough to keep this cycle going.  In other words, it ends with a deflationary spiral, not an inflationary spiral.  This is far worse because not only does it mean that we lose all our money but we actually lose all of our stuff which is collateralizing all of these loans.  Or to put it another way (emphasis added):

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.

–Thomas Jefferson 1802

  1. littlefish
    July 25, 2012 at 1:11 am

    Nice post. Frightening, but understandable. Thanks

  2. Anonymous
    August 7, 2012 at 4:29 pm

    I doubt much consumer debt existed in countries that experienced hyperinflation. Who actually believes the Fed is going to permit homeowners to pay off their mortgages and credit cards with worthless dollars? That goes for student loans as well.
    Have you seen Gary North’s challenge to deflationists?http://lewrockwell.com/north/north1180.html

    • January 25, 2014 at 5:33 am

      Apologies if you took this the wrong way but we feel that is insulting to have to work for picees of paper that are worth less and less every day. Your savings depreciate over time. That’s an? insult. The Constitution demanded that we use real money, but it has been ignored. That’s an insult. Laughing at such a crazy system is a natural reaction to the insulting system that has been forced upon us. Gold and silver will have the last laugh, as they have done for 5000 years.

  3. Free Radical
    August 7, 2012 at 4:52 pm

    In order to prevent them from paying off their loans with dollars, they would have to completely change the currency laws which require everyone to accept dollars in discharge of any debt. But the point of the post is that this won’t even be an issue because there won’t be any “worthless dollars” because there won’t be hyper-inflation. There will be hyper-deflation. Countries with hyper-inflation didn’t have massive consumer debt (I am assuming) because their currency wasn’t created by debt, it was printed arbitrarily by the government. In other words, it was the type of currency Austrians commonly mistake ours for.

  4. Anonymous
    August 7, 2012 at 5:54 pm

    Good distinction. Printed currency versus digital dollars borrowed into existence (and yes, worthless dollars won’t even be an issue). I doubt much lending went on in nations that hyperinflated.
    In his article Gary North seems to be assuming our digital dollars will always exist and be accepted as money. Our money in its narrowest sense, M0 (currency), is only about US $1 trillion. Most of that is overseas. Banks have little of it in their vaults. The FDIC can’t print it. I wonder why he believes public confidence is based on the existence of the FDIC? (Most people don’t even know what it is). He also lumps all deflationists into one group. (There seem to be different cases being made by a number of proponents).

  5. Anonymous
    August 15, 2012 at 9:30 pm

    I’m far from an expert on this but I think you may be misconstruing the Austrian position from what I’ve seen the position seems to be not that hyperinflation is inevitable but that either hyperinflation or what you describe (deflation) is inevitable. When you explain how they must inflate more and more in order to keep the cycle going, if central banks attempt to keep inflating to avoid the deflation would this not eventually lead to hyperinflation?

  6. Free Radical
    August 16, 2012 at 4:23 pm

    No but there is a bit of a semantic game that Austrians will play here. “Hyperinflation” as most people understand it, means that PRICES rise at an uncontrollable rate. This has been the case in the historical examples often cited like Weimar and Zimbabwe. However, one of the things that Austrians get fussy about is the definition of “inflation.” They will often claim that the proper meaning of the term is an increase in the money supply. I disagree with this for two reasons. First, in general, I don’t see the point in insisting that a word must mean something different from what everyone else understands it to mean. Second, and more importantly, prices are what matters, not the money supply. The money supply only matters because it affects prices. Nonetheless, Austrians when cornered will sometimes say “look we already have hyperinflation” and point to the exponentially growing money supply. “Don’t you even know the definition of inflation. Clearly you don’t know the first thing about economics.” But this is beside the point. If you can have exponentially increasing money supply without runaway prices it’s difficult to argue that this is something we should be particularly terrified of.

    I’ve never heard an Austrian say that either hyperinflation or deflation is inevitable. If you know of one I’d be interested to see it.

    • Anonymous
      August 20, 2012 at 7:09 pm

      Well to be fair that is the original meaning of the word, they just didn’t change it. It’s not really a semantic game as long as everyone understands the meaning you intend.

      Here is one saying hyperinflation is not inevitable,
      You did a write up on another of his articles actually, while he doesn’t say deflation is inevitable defaulting could easily lead to, or be brought on by it.

      Generally from what I’ve seen all the predictions tend to be qualified by, if the government or central bank does x, while also using Austrian defenitions.

  7. Free Radical
    August 22, 2012 at 6:47 am

    So I don’t think my response to the previous comment was entirely clear. What I was getting at was essentially “no, if the central bank tries to keep inflating to avoid the deflation, it wouldn’t necessarily (or probably) lead to hyperinflation UNLESS you define hyperinflation as exponentially increasing money supply.” It’s true that this was the original definition, it’s just that it’s not the most useful. But I didn’t mean to start an argument over it.

    Gary North actually mentioned in the post I was responding to before that inflationists don’t think hyperinflation is unavoidable. I think some of them seem to think this but regardless, they don’t really understand the situation we face and this is apparent in the article you cited. It’s a big can o’ worms though so I’ll write a post about it.

  8. July 6, 2014 at 9:11 am

    ” In this scenario, all the things they say are correct including the stuff about inflation being a stealth tax on people who hold money, and the notion that governments can “inflate away” their debt. The problem is that this is not the system we actually have. [..] What we have is a central bank (the Federal Reserve) which prints money and lends it. This is entirely different from just printing and spending.”

    What Zimbabwe, Germany, and other countries with hyperinflation had was also a central bank that “just lent out money”. The mistake you are making is assuming that governments pay back their loans. In practice they just keep borrowing more and more from the central bank. If you put a black box around the government and central bank what you see is the black box makes money and spends it. There is no real difference between what we have an a government that just printed and spent money. When the historians write about Zimbabwe they often don’t even mention the central bank buying the government bonds. If the US gets hyperinflation, the future historians may leave out that part too.

    Please see if you can find any error in my post on hyperinflation:

    • Free Radical
      July 6, 2014 at 11:12 pm

      You are half right about this (which is to say you are basically right but you are missing something). Yes, the gov. and CB together can “print” money by borrowing and spending with no intention of paying back. But you have to look at this within the context of an economy in which everyone else (taken together, not literally everyone) is also heavily indebted to the CB (vis a vis the banking system). This generates a lot of built-up demand for money to pay back loans. The money is not just floating around out there holding value based solely on some notion of “confidence” in it.

      I admit it is possible for the Fed and the Government together to cause a hyperinflation if they really put their minds to it but it would take dramatically different policy from what we currently have. And most importantly, if you are worried about government being to powerful, it is the opposite that you should be more concerned about.

      • July 6, 2014 at 11:57 pm

        Do you think countries that got hyperinflation did not have private debt before the hyperinflation started? I don’t think you will find any correlation between private debt levels before hyperinflation and hyperinflation. It is really about government debt and deficit levels.

        It is never the case that the central bank or government is tying to make hyperinflation or needs a pro hyperinflation policy to get hyperinflation. You are way off.

        Please read this:


      • Free Radical
        July 7, 2014 at 4:11 am

        I’m not saying hyperinflation is possible, I’m saying that all of the concern about hyperinflation in recent years related to supposedly “loose” monetary policy is confused. This has been the case so far. When we start to see double digit inflation, then you can tell me I’m “way off.” I really don’t like spending too much time responding to people who say things like that. It shows that you aren’t open to the possibility that I might see something that you don’t see. You seem to just want to push the standard hyperinflation view on me which you probably think I have never encountered before but this is not the case. Just in case I am being too hard on you I will give you this.

        Your problem is with things like this:

        “There can be a panic to get out of bonds. There may be $3 trillion in bonds coming due in the next 12 months that might not get rolled over if people started not trusting bonds (I am trying to nail down how much short term the public holds, separate from the Fed and Social Security). There is also the excess reserves of around $2 trillion that are earning interest, much like government bonds really. The current deficit of around $1 trillion would also have to be financed with new money if nobody but the Fed was buying bonds. Altogether this would be something like $6 trillion over 12 months.”

        You don’t seem to have a clear theory of the price level here. The first problem is that all of these hyperinflation concerns start with people “losing confidence” in something for some unexplained reason. Why would people lose confidence in bonds? They are afraid the government won’t pay because of all the debt? But that doesn’t make sense because we are also assuming that the government can just print money to pay its debts. So why the loss in confidence in bonds? What’s more, if they do lose enough confidence in bonds, that will mean that the prices of them will fall and the government will be able to buy them back for much less. This will reduce the amount of newly printed money they will need to pay off the debt. In other words this is a negative feedback loop, not the kind of thing you need for a hyperinflation. Furthermore, what are people fleeing into if they are losing confidence in bonds? Surely it can’t be dollars because what you really need is a “panic” to get out of the dollar, not into it.

        The point, as I have been saying, is not that hyperinflation is impossible, it is that the conditions are not there at this time. We have the opposite problem. We are not printing money to get out from under ridiculously large reparations imposed on us by a conquering power. We are printing money to keep the economy from collapsing under a private debt load that we can’t pay back unless the inflation which we anticipated when we took it on materializes. If your argument comes down to “well it’s possible that everyone could suddenly ‘panic,’ you can’t prove it’s not possible!” then you got me, congratulations on your logical and rhetorical cunning.

  1. August 8, 2012 at 3:00 am

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