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MMT Defenders Say Hyperinflation Risk Misunderstood

MMT deniers often cite the ever present danger of hyperinflation were governments to use its power to spend or give money into circulation, as if it were a tinder box ready to burst into flame.  Here in Pragmatic Capitalism is a good outline of why this is a gross exaggeration of the dangers and some background on just how an entire citizenry can lose confidence in its currency.

21 March 2011 by Cullen Roche


“Inflation is always and everywhere a monetary phenomenon.” – Milton Friedman

Hyperinflation is poorly understood. As its name might imply, most people believe hyperinflation is merely inflation on steroids. But that’s not necessarily accurate. Inflation can and does occur in a perfectly healthy economy. In fact, since 1913 when the Fed was founded inflation in the USA has consistently risen at 3.5% per year on average. One might assume that this means the country has experienced some great injustice, but the truth is that the 1900′s were characterized by the greatest economic expansion and wealth creation the world has ever seen. Despite the common citation that “the $USD has lost 90% of its value” Americans experienced an unprecedented period of prosperity during this inflation. In fact, the prosperity became so gross in the 1990′s that Americans felt entitled to second homes, second cars, and just about every other luxury good known to man. What has not occurred is hyperinflation, which is a very different animal than inflation. Hyperinflation is a disorderly economic progression that leads to complete psychological rejection of the sovereign currency.  (link to full article)

However, while the list of conditions for hyperinflation make the the US or UK  very safe, they look worryingly familiar to Ireland within the EMU. Smart Taxes score is in bold.

What is consistent among cases of hyperinflation is a number of rare exogenous circumstances:

  • A ceding of monetary sovereignty (usually in the form of foreign denominated debt, a currency peg, etc).      Yes, We tick this box
  • Extraordinarily unusual social circumstances (war, regime change, etc.).                                                               No, thankfully
  • Very low levels of faith in government during regime change (high public mistrust).                                             Yes, We tick this box
  • Ineffective government response or rampant corruption.                                                                                              Yes, We certainly tick this box
  • Combustible political environment.                                                                                                                                    No, OK here because of public passivity
  • A collapse in the domestic economy.                                                                                                                                   No, Not Yet, but wait one year
  • A breakdown in the tax system.                                                                                                                                            No, Not yet, but rising black economy

The most notable environments involving hyperinflations are war, regime change, government corruption and a ceding of monetary sovereignty.

Posted in Money Systems, Resilient Investment.

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