We use cookies (including third-party cookies such as Google) to remember your site preferences and to help us understand how visitors use our sites so we can improve them. To learn more, please see our privacy policy and our cookie policy.

To agree to our use of cookies, click 'Accept' or choose 'Options' to set your preferences by cookie type.

Options Accept
BullionVault

CHARTS

  • English
  • Deutsch
  • Español
  • Français
  • Italiano
  • Polski
  • 日本語
  • 简体中文
  • 繁體中文
  • Daily audit
  • Help
  • Contact
  • Deposit
  • Login
  • Open account
  • ABOUT US
    • About BullionVault
    • In the press
    • Reviews
    BUY/SELL BULLION
    • Vaulted gold & silver
    • -Live order board
    • -Daily Price
    • Coins for delivery (UK)
    INVESTMENT GUIDE
    • Guide to gold
    • -How to buy gold
    • -Gold investment
    • -Gold investment plan
    • -Investment insurance
    • -Compare asset performance
    • Guide to silver
    • -How to buy silver
    • Guide to platinum
    • -How to buy platinum
    GOLD NEWS
    • Gold news front page
    • -Gold price news
    • -Opinion & analysis
    • -Market fundamentals
    • -Gold/Silver Investor Index
    • -Infographics
    CHARTS
    • Gold price
    • Silver price
    • Platinum price
    • Price alerts
  • Login
  • Open account
  • BUY/SELL BULLION
  • Vaulted gold & silver
    • ⤷
    • Live order board
    • Daily Price
  • Coins for delivery (UK)
  • INVESTMENT GUIDE
  • Guide to gold
    • ⤷
    • How to buy gold
    • Gold investment
    • Gold investment plan
    • Investment insurance
    • Compare asset performance
  • Guide to silver
    • ⤷
    • How to buy silver
  • Guide to platinum
    • ⤷
    • How to buy platinum
  • GOLD NEWS
  • Gold news front page
    • ⤷
    • Gold price news
    • Opinion & analysis
    • Market fundamentals
    • Gold/Silver Investor Index
    • Infographics
  • CHARTS
  • Gold price
  • Silver price
  • Platinum price
  • Price alerts
  • ABOUT US
  • About BullionVault
  • In the press
  • Reviews
  • Help
  • Contact
  • Daily audit
    • English
    • Deutsch
    • Español
    • Français
    • Italiano
    • Polski
    • 日本語
    • 简体中文
    • 繁體中文

Gold News

Live support

NEED HELP? ASK US NOW

Search form

Gold News front page

Gold Price News

Gold Prices 'Caught' Between Covid and Massive Stimulus Ahead of Chinese New Year

More...

Gold Investing In Depth

Learn about gold bullion bars

Learn about gold bullion coins (and costs)

Gold investment: Why & how?

Gold Investment Analysis

  • Latest Gold Investor Index
  • Diversification: Gold as investment insurance
  • 40-year Asset Performance Comparison Table

Gold Articles

Opinion & Analysis

Gold Price News

Investment News

Gold in History

Gold Books

Gold Investor Index

Gold Infographics

Archive

  • January 2021 (18)
  • December 2020 (24)
  • November 2020 (23)
  • October 2020 (25)
  • September 2020 (25)
More...

List of authors

Hyperinflation in the UK? 3 Key Factors

Tuesday, 4/14/2020 09:01
Not Zimbabwe. Not Yet...
 
The BANK of England has been accused of the kind of money-printing that could lead to Zimbabwe-style hyperinflation, writes John Stepek at MoneyWeek magazine.
 
When most of us think of money being printed, we immediately think of Zimbabwe.
 
So is this – hyperinflation – really a scenario we should be concerned about?
 
Let's have a look at what actually causes hyperinflation – and what that can tell us about how likely we are to end up there.
 
The first point to make is that hyperinflation is qualitatively different to inflation. During inflation, prices are going up. They may even be going up a lot (for example, inflation in Britain in the 1970s went as high as 26%).
 
But in hyperinflation, the speed of the increase in prices is so extreme that measuring it is almost irrelevant. I've seen one estimate suggesting that inflation in Weimar Germany peaked in 1923 at 29,500%...a month (which would mean prices doubling once every four days). And Zimbabwe in 2008 was even worse.
 
So hyperinflation really describes a situation where the currency is essentially meaningless. It's the collapse of an economy and its currency, rather than simply a tough period.
 
As Ray Dalio of Bridgewater points out in his book on debt cycles (A Template For Understanding Big Debt Crises), after hyperinflation "the currency never recovers its status as a store hold of wealth".
 
Or, to quote the title of Adam Fergusson's history of the Weimar collapse, hyperinflation is quite literally "When Money Dies".
 
Economist John Maynard Keynes (as ever) had a pretty pithy way of summing up the issue. Under hyperinflation, "all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery."
 
I think that most of us would agree that there's a difference between 1970s Britain and 1920s Weimar Germany or 2000s Zimbabwe or 2010s Venezuela.
 
So what drives such a catastrophic collapse? Behavioural analyst James Montier, who works for US asset manager GMO, wrote a good paper on hyperinflationary episodes in 2013. The key thing to understand is that hyperinflation is not the result of money printing alone. In fact, it's more correct to say that rampant money printing is a side effect of the conditions that give rise to hyperinflation.
 
There are three main factors that contribute, says Montier.
 
Firstly, you need a huge supply shock – in other words, there needs to be a sharp reduction in the productive capacity of the economy. That means there is not as much "stuff" to go round, so that demand outstrips supply, which is inflationary.
 
You can see this in all the big famous hyperinflations, and also in the less well-known ones. In Weimar Germany, the supply shock was World War I (hyperinflation often arises in the aftermath of war). In Zimbabwe, the supply shock was the destruction of agricultural production through cronyism and mismanagement.
 
Secondly, a country needs to have a lot of obligations that need to be paid in a foreign currency – possibly debt that is denominated in an overseas currency (often US Dollars, or in the olden days, gold), or simply a need to make payments abroad that the country's productive capacity can't easily accommodate.
 
This makes it impossible for a country to simply print money to get rid of its obligations, and it encourages money to flee the country, which in turn leads to pressure to print even more, which drives down the value of the currency, and so on.
 
Again, if you look at historical hyperinflations, all of them involve countries or regimes with large overseas obligations. In Weimar Germany, it was reparations, denominated in gold. In Zimbabwe, the big issue was that the government made such a mess of the economy that it had to import food (which had to be paid for in US Dollars).
 
Making it simpler, "good" money flows out of the country while the "bad" money stacks up at home (eventually in wheelbarrows).
 
Thirdly, you need a vicious circle to drive prices up and sustain them at the extraordinary levels seen in a hyperinflation. This "transmission mechanism" comes in the form of rising wages.
 
Prices soar, workers can't pay for goods, so they demand and get pay rises, which drives up prices further, and so on. You tend to get price and wage controls imposed at this point but obviously they don't work, because "black market" rates take over.
 
In short, if you look at these factors, it's clear that while money printing is the mechanic by which hyperinflation takes place, the money printing is the result of a series of other conditions that cause the collapse of an economy's productive capacity.
 
Put very simply, the economy is no longer able to produce enough to both service its debts and meet the needs of the population. The remaining productive capacity goes on meeting the most important obligations while the other needs are met with increasingly worthless IOUs.
 
It's like having a big mortgage, then losing your job. You keep paying the mortgage so you have a roof over your head, but start handing out IOUs to pay the rest of your bills. Clearly, this couldn't happen in real life, but if it did, it wouldn't take long before all your other creditors were demanding "real" money.
 
So this is why the idea that printing money = hyperinflation is flawed. Let's look at the UK, for example. At the moment, the UK has certainly suffered a severe supply shock, but coronavirus has imposed a demand shock to match.
 
And when demand comes back, there is very little to stop supply from rising to meet it. We're not looking at the sort of productive capacity destruction caused by extreme social unrest or war.
 
The UK's other big advantage is that it still issues debt in its own currency and people will buy it. So Britain does not have the same issues with obligations denominated in overseas currencies that have historically gone hand in hand with hyperinflation.
 
So the good news is that hyperinflation in the UK seems highly unlikely. The bad news is that high inflation – rather than a hyperinflationary collapse – is much more feasible. Indeed, at some level it's part of the plan for getting rid of all this debt. We'll have more on that in the magazine. If you are interested in learning what past market crashes might have to teach us about the reaction to the coronavirus crisis, subscribe to MoneyWeek.
  • Reddit logo
  • Facebook logo
  • Twitter logo
  • Google logo
  • Yahoo logo
  • LinkedIn logo
  • Digg logo
  • StumbleUpon logo
  • Technorati logo

Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

Mobile apps

 - live trading 24/7

 - buy & sell instantly

 - up-to-the-second charts

 

 

 

Daily news email
Go to 'communications settings' 

Get the latest daily gold price news free by email

Latest gold news by email

 

 

 

Gold Investor Index
5 January 2020

Gold Investor Index

Gold investing +58% in NY21

 

 

 

LBMA webinar
21 January 2021

LBMA

London gold trading

 

 

 

International
Investment

16 December 2020

Gold 2021

Gold in 2021

 

 

 

LBMA Alchemist
1 December 2020

Newton

True Gold/Silver Ratio

 

 

 

  •  Email us

Market Fundamentals

  • 'Cut Bullion Duty to Cut Smuggling': India's Gold Industry
  • Platinum Price Hits 4-Year High Even as Electric Beats Diesel Cars in Europe
  • Record Investing Pushes 'Industrial' Silver and Platinum into Deep Deficits
More...
  • Cost calculator
  • Cookies
  • Terms & conditions

©BullionVault Ltd 2005-

  • Twitter
  • Facebook
  • LinkedIn
  • YouTube

Save your cookie preferences

We use cookies to remember your site preferences, record your referrer and improve the performance of our site. For more information, see our cookie policy.

Please select an option below and 'Save' your preferences.

Save

You can update your cookie preferences at any time from the 'Cookies' link in the footer.

Secure auto-logout warning

You have not been active for some time.

For your security you will be logged out in   minutes unless you take action.