Everybody has heard the stories about hyperinflation in Germany in the 1920s; one of the indirect causes of WW2. In 1922, a loaf of bread cost 163 Deutschmarks. By September 1923, during hyperinflation, the price had increased to 1,500,000 Deutschmarks, and at the peak of hyperinflation, in November 1923, a loaf of bread costs 200,000,000,000 Deutschmarks.
Or the sad case of Zimbabwe in 2008 and 2009. Zimbabwe’s peak month of inflation is estimated at 79.6 billion percent month-on-month or 89.7 sextillion percent year-on-year in mid-November 2008. It was so bad that the Reserve Bank of Zimbabwe took to printing hundred trillion dollar banknotes. That’s ten followed by fourteen zero’s. And with this note, you could not even pay for bus fare.
What caused hyperinflation in these two countries? Easy answer. The respective central banks cranked up the printing presses and essentially created massive amounts of ‘money’ out of thin air.
But aren’t Central Banks doing the same in 2020 in response to the COVID crisis? They sure are. The Fed is forecast to print $5 trillion of ‘new’ money this year. European governments and the European Central Bank will print more than $2 trillion. Japan, Canada, Australia, New Zealand. They are all doing it!
So if Central Banks are doing now precisely the same that Germany did in the 1920s and Zimbabwe did in the late 2000s why am I convinced that hyperinflation will not occur?
The answer is easy. In the 1920s only Germany turned the printing press on. None of its neighbours followed suit. Same as Zimbabwe—they were alone in printing vast amounts of money. The obvious consequence was that their exchange rate was hammered and this was the primary cause of hyperinflation in those two countries.
But if all Central Banks are printing ‘funny’ money, how does this impact on their respective exchange rates? Answer. It does not. Ergo, no hyperinflation!
But while there is no debasement in currency to currency exchange rates there will be debasement in currency to hard asset prices. Hard assets are those things that you can see and touch and not readily destroy. Land, preferably arable land, is a good example. So is gold. Watch the prices of these two assets in the coming years.