Hyperinflation is Already Here – You Just Haven't Realised It Yet.

1922 postwar germany under the rule of the newly formed weimar republic found itself under significant duress struggling with the demands of onerous war reparations demanded from them by the victors of world war one this combined with domestic stimulus efforts to rebuild a post-war nation combined with hits to productive capacity like the french occupation of the nation's most powerful industrial centers gave the government little option but to print more money in an attempt to get their economy working in any capacity this reckless printing combined with equally reckless borrowing and the reduction in productive capacity of the nation saw the value of the german paper mark tanked to the point where banknotes were better used as fuel to heat households rather than units of exchange hungary 1945 a nation devastated by the fallout of the second world war over half of the nation's factories and businesses had been destroyed massively reducing their potential to provide a stable standard of living to their people the government had no choice but to direct more and more money through private banks to issue loans to businesses to rebuild from the ground up literally this reckless money creation combined with equally reckless borrowing and the reduction in the productive capacity of the nation saw the value of the hungarian pengo tanked to the point where prices were doubling in the nation every 15 hours yugoslavia 1992 the breakdown of the soviet union in an ongoing conflict in croatia and bosnia industrial capacity is reduced and this slowdown of output is accelerated by a trade embargo placed on the country by the united nations to combat this the government turned on the money printers and made borrowing a lot easier you might be able to guess what came next zimbabwe 2007 a poorly thought out set of policies saw a mass exodus of capital from the nation driving down the exchange rate of their dollar this made importing farming supplies like fertilizer and farm equipment very expensive which in turn crippled the output of the nation this combined with the now infamous land reform act gave the government little options but to try and print their way out of trouble to no avail north korea 2009 farming output was hit by sanctions and a poor year for weather money printing hyperinflation venezuela 2016 ongoing political instability combined with international sanctions gave the government no choice but to print money in an attempt to maintain generous living standards this reckless money creation combined with the massive reduction in output hyperinflation in all of these examples which are just a selection from the last century there are a few very noticeable common trends some kind of destabilizing event be it a war or a natural disaster or a piece of policy that leads to a sharp decline in productive capacity which is corrected with stimulus measures funded by the printing of money unfortunately almost all of these examples result in some form of failed state economic downturns are unfortunate realities but they are to be expected market crashes might sting a few investors and push average people's retirements back a few years but for those with the time horizon and fortitude of spirit to hold on to a broad portfolio of assets everything normally ends up just fine but hyperinflation is different almost no economies recover from this diagnosis without some type of massive regime change or the total abandonment of sovereign currency neither of which are particularly appealing options hyperinflation is game over the united states of america 2020 the fallout of the coronaviruses hit the nation particularly hard over 30 million people have been infected and half a million have tragically passed away while the human cost of this ordeal has obviously been the most devastating the pandemic has had an undeniable impact on the economy millions are still out of work through no fault of their own many small medium and even large corporations have been forced to close permanently once stable industries like tourism hospitality in-person retail and entertainment have been all but eliminated and despite hope on the horizon for things getting back to normal these sorts of industries are not going to be back at full capacity for a very long time in an attempt to combat this massive drop in economic output the us has printed more than a third of the active money supply in the economy today within the last 12 months this money printing has combined with an increase in private sector borrowing and a drop in productive capacity due to the devastation brought about by the global pandemic if this set of circumstances sounds familiar don't worry because apparently it's all going to be different for the united states and maybe it is maybe the usa really is a special economy that is so large and influential that it doesn't play by the same rules as these historic cautionary tales or maybe not but to know for sure we as always need to look at a few important details when does inflation actually start to become an unsolvable problem in the economy why do people think the usa is immune from the same consequences as all of these other examples and what is the best way for people to protect themselves against this kind of worst case scenario but before we get into that it's time for the big disclaimer that this video will be a case study based on speculations about the future don't alter your financial decisions based on a doom and gloom video you saw on the internet okay good this episode of economics explained is brought to you by skillshare thanks to skillshare you can learn anything anytime anywhere it's basically like netflix for entrepreneurs their platform provides you with unlimited access to thousands of high quality tutorials on virtually every subject imaginable from blockchain to cooking stay tuned until the end to learn more or be the first 1000 viewers to sign up using the link in the video description below to receive a completely free trial of skillshare premium after your trial it's only 10 bucks a month with an annual plan so pause the video right now be one of the first 1 000 viewers and see what all the hype is about the link is in the video description below inflation is a weird concept that can be very frustrating to people to understand we tend to express the value of things in the number of dollars or yen or euro or whatever that we or at least the market would be willing to exchange for that item what is this house worth oh it's 500 000 that new car is 30 grand the plumber charged me 200 just to unclog my sink and it's unbelievable that bitcoin is now consistently trading for over 50 000 american dollars we base economic value on how much a currency is worth so when it comes to assessing the value of that currency itself things tend to get a little bit weird you can almost think of the true value of currency as its exchange rate between other things of value we do this all the time with different currencies no problem at all one american dollar is buying a dollar 31 australian 110 japanese yen and 85 euro cents at a stretch this exchange rate can also apply to other assets one us dollar is buying 0.03 ounces of silver 10 kilos of rice or 160 000 of a bitcoin of course normally we express these exchange rates the other way around but you can start to see that market value is almost always expressed as an equation of dollars to goods so let's take it back to the relationship between something that we are a bit more familiar with let's say the relationship between the exchange rate of american dollars and australian dollars as of making this video one american dollar is buying approximately 1.31 australian meaning an american dollar is worth slightly more than an australian dollar now there are a few things that could impact this relationship australian dollars could become more or less valuable or american dollars could become more or less valuable but even this idea of value could throw a few people off i prefer to think of this abstract relationship in terms of goodness if for example america falls into total chaos which i know might be a hard reality to imagine well then the goodness of american dollars would fall this would mean that australian dollars would increase in relative value despite not necessarily being any more good themselves 100 australian dollars could still buy the same amount of stuff that they did before america fell into chaos it's just that now you can buy more american dollars with them now moving on from this example that hits a little bit too close to home let's consider another example imagine the relationship between the us dollar and the s p 500 index again we expressed this as an equation with one of the units of the index been worth approximately 400 american dollars at the time of making this video since the beginning of 2020 this index which is made up of the 500 largest companies in america has undoubtedly become less good sure there are a few companies that have benefited from working from home or delivering products to combat the pandemic but most companies are struggling global supply chains have been slowed making production more difficult people are moving about less therefore burning less fuel and this is all to say nothing if companies directly involved in tourism or hospitality which are now basically on government life support it's fair to say that this collection of 500 companies is less good than it was 16 months ago it's producing less making less profits and is far more reliant on government subsidies that may or may not continue into the foreseeable future it would therefore stand to reason that all other things being equal this index would be exchangeable for fewer american dollars today than it was back at the beginning of 2020 but of course that's not the case in fact it's actually exchangeable for 30 more dollars than it was at the beginning of 2020 so either this equation is totally illogical or the true value of dollars has fallen faster than the true value of this collection of companies now of course we normally see an appreciating stock market as a good thing but again that's because we measure value from the perspective of dollars if the stock market appreciates in value we naturally assume it's because the companies in that market are doing better for their investors we don't assume it's because our dollar-based frame of reference has fallen think of it another way if the stock market and house prices and wages increased by 50 in a year we would all think that's a really good thing but if an average grocery trip became 50 more expensive in that same year alarm bells would start ringing now of course normally inflation is measured using one of these relationships between dollars and some kind of asset but it's not any of the examples that we have seen thus far instead it's a collection of goods and services called the consumer price index you can find a list of what's included in this index in your own country and it does vary from country to country broadly representing the spending habits of consumers in that nation now normally the value of these items is highly correlated in the short to medium term with these other assets for example if real estate becomes more expensive then rent is going to cost more which means businesses are going to have to charge more to remain competitive and those additional charges will be registered as increased prices in the consumer price index but here is the thing it hasn't inflation has remained comfortably below 3 for this entire money printing ordeal this becomes even more bizarre when you consider one other factor that contributes to the price tag of things their component parts iron ore has more than doubled in price in the past 12 months the same is true of lumber crops like corn and soybeans that make up a good portion of the food that we eat are up more than 70 percent but the consumer price index an index of things that are made from steel and wood and corn and soybeans has barely moved so what is going on here is there some creative or potentially fraudulent accounting going on or is america really too good for inflation now so far the two big forces to consider is that the us has made a lot more money while not making as much stuff this means that there is naturally more money bidding for less stuff which drives prices up simple supply and demand so far these price hikes have been exclusively in asset markets like stocks cryptocurrencies real estate and raw materials but despite the direct relationship between these markets and the markets for consumer goods and services the consumer price index that actually acts as the gauge for what we report as inflation has remained stubbornly low now the bad news is that a lot of this is likely due simply to timing at the moment people are still relatively apprehensive about spending too much money the savings rate in the us is at its highest level in recent history which means that demand for investment assets has risen at the expense of regular consumption now this won't last forever in many instances this physical responsibility is not really even a matter of choice and more so a matter of being stuck at home and unable to spend up big on a holiday or a night out with friends once that becomes a possibility again if history is anything to go by you better believe that most people are going to spend through their covert savings pretty quickly in fact in a lot of the examples we saw at the beginning of this video hyperinflation started a year or two after the money printers were first switched on in earnest now there still might be one saving grace for the american economy and that is its currency status as the world reserve now this term is thrown around a lot and people will often use it in this debate to argue away the possibility that the u.s could end up like venezuela regardless of how much they let the money printer run but more often than not people don't fully understand what it means back 70 years ago it really did mean something before 1973 american dollars were backed by gold and the us had by far and away the largest gold reserves in the world other currencies around the world were in turn pegged to the us dollar and hence the dollar was the foundation of all global finance today it means something different the us dollar is no longer backed by gold and most global currencies are not pegged to the us dollar and are instead free-floating on the foreign exchange market today it simply means that the us dollar is the most widely held foreign currency by other nations china alone holds close to 3 trillion us dollars and total global reserves top 7 trillion what this effectively means is that the value of the us dollar is not only dependent on what can be purchased within its own domestic market but also what it can purchase around the world let's say you want to buy a commercial order of smartphones from china and import those phones to your home country of canada let's say well you wouldn't be able to pay for those phones in canadian dollars the chinese company producing these phones would likely question what you want them to do with your weird maple dollars and request rmb instead however if you offered american dollars they would likely be far more accommodating because american dollars are far more widely recognized in fact this sort of deal happens all the time because american dollars are easier to deal with than chinese r b this is part of the way that china has been able to accumulate so much american money so the value of american money depends on the productive capacity of the planet more so than the productive capacity of the states this does genuinely give american dollars some resistance to depreciation but it's not limitless and it also doesn't protect the united states from a situation where the entire global economy is impacted like let's say a global pandemic now of course this isn't necessarily a foregone conclusion but the writing is on the wall so the next logical question you might be asking is how do you prepare for this now the traditional answer to this would be to hold real assets like precious metals productive real estate or even stocks in companies that wouldn't be too heavily impacted by domestic currency fluctuations new age solutions might include cryptocurrencies and it's difficult to say that this was bad advice in the past few months but there is a more direct solution shorting currency now you might ask how do you do that typically if you want to short something like a stock you need to borrow that stock from your broker then sell it instantly in the hope that the price falls so that you can buy the same stock at a lower price to give back to the broker you originally borrowed it from but how would you do this with money well it's simple you borrow money you then exchange that money for some kind of underlying asset like let's say real estate or a stock portfolio in the hope that the money becomes worth less so you can give it back more easily at a later date imagine this you were shopping for a new home in germany in 1920 a lovely flat in berlin would likely run you about 10 000 paper marks pretty expensive back then but whatever the nation was on the up and up under the control of the new weimar republic so you put down a deposit of two thousand paper marks and borrow the remaining eight thousand with a fixed rate mortgage fast forward two years and hyperinflation has gripped the nation this is obviously causing all kinds of issues for day-to-day life but it presents you with an interesting opportunity you pick up a single marble off your desk and sell it to a child playing on the street for some of their pocket money you then take your marble money to the bank and proceed to pay off your 30-year mortgage 2 000 times over yes of course hyperinflation will cause other issues that still impact your day-to-day life but ultimately you now have a place to live for the price of a marble this is a very extreme and oversimplified example but it goes to show that a healthy level of debt used to purchase stable assets can be a really good hedge against inflation the thing is though wealthy people know this in an environment where sophisticated investors are anticipating inflation they will look to take on more debt to invest especially when that debt can be taken out at record low interest rates lots and lots of rich people borrowing lots and lots of money to invest naturally increases the demand for and therefore price of those investments while also putting more cash into circulation more money floating around in an environment where everything is being brought up as a hedge against inflation ultimately causes inflation this video was made possible by skillshare thanks to skillshare mastering your craft has never been 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link is in the video description below thanks for watching mate bye

Channel: Economics Explained

Views: 1,614,203

Rating: 4.8454275 out of 5

Keywords: inflation, hyperinflation, hyper inflation, us inflation, us hyperinflation, usa inflation, america inflation, us inflation rate, current us inflation rates, united states inflation rate, consumer price index, us consumer price index, usa consumer price index, inflation cpi, us savings rate, savings rate, usd global reserves usd currency reserves, global currency reserves, world reserve currency, us money supply, economics, explained, economics explained

Id: 1HmGLV46L60

Length: 19min 27sec (1167 seconds)

Published: Sun Apr 11 2021

Reddit Comments

[u/danieldukh]

If this Aussie can see the writing on the wall, we all should

Edit: I forgot to mention, the way he ended it with the real estate prices to go up, quite scary.

[u/leadrain86]

My solution: buy a house on enough land to hunt and fish on. Make it self sustaining with a well and solar panels with backups like a wood stove, gas generators etc. Never have to worry about any of this crap again because I have somewhere to go where I have shelter, create energy, and can make food.

The rich af version would be do this plus acquire natural resources, transportation routes, equipment, and factories.

[u/DarkWingDuck270]

It's really not that bad in Mad Max times. My people will come down from the mountains and take over so just don't worry about it. Also, ima take half of your stuff....lol jk just a little post apocalyptic humor.

[u/Drak_is_Right]

This isn't hyper-inflation. Please use phrases and terms correctly.

[u/Pretend-Tonight657]

I hope history shows that it’s serious inflation but not hyperinflation. If that happens, the entire world economy will collapse. We will be living Mad Max times.

[u/evilgenius66666]

Hyperinflation is like the Spanish Inquisition.

[u/VRichardsen]

The good thing is that if the dollar inflates, the peso deflates, so here in Argentina we will just chill 😎

[u/happyisles33]

r/badeconomics did a take on this video.

https://www.reddit.com/r/badeconomics/comments/mt3emq/economics_explained_thinks_theres_us/?utm_source=share&utm_medium=mweb