Many of my clients worry that today's easy money will eventually
have devastating inflationary consequences. Are they right? As a
world-class nonexpert on hyperinflation, I decided I needed to hit
the books. After boning up, my short answer is no -- but with some
First, there is a lot of irresponsible talk that easy money and
large deficits will inevitably lead to hyperinflation. Glenn Beck
has been predicting hyperinflation since 2008, saying he has more
faith in a piece of paper towel than in the U.S. dollar. Every
ultraconservative Web site I look at thrives on apocalyptic ads
predicting the dollar's demise, which would certainly lead to
higher commodity prices and would likely fuel more general
The Little Book of the Shrinking Dollar,
author Addison Wiggin makes the preposterous claim that "every
paper currency in the history of civilization has eventually lost
its entire value." As one studies hyperinflation theory, alas, one
has to wade through a lot of raw sewage like this.
Mainstream worrywarts. But not everyone banging the
hyperinflation drum is a crackpot. Famed hedge fund managers Nassim
Taleb and John Paulson have established funds that would benefit
from hyperinflation. Baupost Group's Seth Klarman, one of the best
investors ever, thinks hyperinflation in the U.S. is a possibility.
In 2010, he told Jason Zweig of the
Wall Street Journal,
"I worry now that a new element has been introduced into the game,
which is, in effect, Will the dollars we make be worth
anything?...It's not clear that any currency is actually all that
trustworthy." Klarman's solution: Buy gold, gold-mining stocks and
long-term options that will appreciate as interest rates surge.
Although Klarman thinks hyperinflation is unlikely, he warns
against complacency. That's because he thinks government figures
dramatically understate the inflation rate. Moreover, he reminds
investors that things can go south in a hurry.
My biggest complaint about the hyperinflationists is that many
ignore history. Printing a lot of money does not by itself produce
hyperinflation, as James Montier points out in an outstanding
paper, "Hyperinflations, Hysteria, and False Memories," that he
wrote for money manager GMO. If running the government printing
press in the wee hours were the whole problem, we'd see
hyperinflation all the time--and we don't. It takes an enormous
shock to trigger runaway inflation, such as a war or a general
Worst cases. Many people think the worst hyperinflation of the
20th century occurred in Germany's Weimar Republic after World War
I. They're wrong. It actually occurred in Hungary after World War
II, when prices rose at the equivalent of 207% per day in July
1946, when inflation was at its peak. The problem? The war
destroyed half of Hungary's industrial capacity and damaged almost
all of the rest. In addition, the Russians extracted huge war
reparations. The second-worst hyperinflation in modern times
occurred in Zimbabwe after a disastrous drought and ill-conceived
land reform. Inflation raged at 98% a day in mid November 2008, and
the world was introduced to its first $100 trillion bill.
Well, if it takes a shock and not merely printing money to
produce hyperinflation, what could cause it today? The breakup of
the euro zone would be the most likely culprit, speculates Montier.
Star U.K. hedge fund manager Hugh Hendry says hyperinflation could
result from a European disaster that would trigger deflation first
and then hyperinflation as politicians tried to cure the
Am I petrified? No, but my research did lead me to ask a
question: Why don't I own any gold? Pretty soon I think I will.
Columnist Andrew Feinberg manages a New York City-based hedge
fund called CJA Partners.