A Note on Hyperinflation

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Monday, September 6th, 2010 | blogging

Robert Wenzel of Economic Policy Journal recommends Gonzalo Lira’s excellent piece on hyperinflation, which we discussed here. Wenzel points out a couple of things he believes could be different in a U.S. hyperinflation as compared to that which Chile suffered.

The one note of caution I must add is that Lira looks beyond a coming crisis for America and expects things to return to a new better normal, as it did in Chile. This may or may not occur in the United States and may take years or decades if it does return to a new normal. The real point to keep in mind is that things could be very different for the economy, very soon. Learn as much you can about volatile economies, especially those that suffered under hyper inflation, so that you have some kind of edge if such a period hits the U.S.

One other point, during hyperinflations asset prices including stocks tend to go up. The drop in the stocks in Chile during the hyperinflation is likely the result of a great fear the companies were going to be nationalized.

Lira ultimately feels optimistic that hyperinflations don’t last long and that things soon return to normal, but we really don’t know whether that would be the case here, nor do we know the particular factors that lead to a new normal. Presumably, conditions in a hyperinflation force the economy into new solutions. Chile had the “advantage” of a right-wing coup, which I rather doubt would happen here.