Mini post: Will a hyperinflationary event in the US trigger hyperinflation here in Canada?

Hello all

This will be just a quick post.  The usual inflation vs deflation debate focuses on the United States.  The general argument for the hyperinflationists is that at some point investors will lose faith in the ability of the US government to tax its citizens in order to make interest payments on its debt.  This leaves only two possible solutions for the US:  Print the money for repayment or default. Both of these options are obviously not particularly appealing to investors as they lose either way, either via outright loss of principal and/or interest payment or via repayment in greatly inflated dollars.

Let me say that I do think there is a chance that the US will face a hyper-inflationary event likely at some point in the next decade.  For an interesting read on what may trigger this and what it may look like, check out this article.  However, where I differ in my opinion is in terms of WHEN this may happen.

I believe that two things must happen before we could see hyperinflation in the US:

1) Consumer deleveraging must run its course.  That may take another few years.

2)  The weakest links must break first.  I’m of the belief that the United States will not be the first domino to fall.  I believe that it will be one of the PIIGS (Portugal, Italy, Ireland, Greece, Spain) who will default first.  If that’s true, the accompanying capital flight out of Europe will find its home back in the go-to safety currency: the US dollar.

But what does that all mean to us here in Canada.  Let’s assume that the US entered a hyper-inflationary episode tomorrow.  How would that affect us?  It is important to briefly elaborate on the definition of hyperinflation.  For this, I will borrow from a quick definition used over at Whispers From the Edge of the Rainforest:

“Hyperinflation is a distinctly different phenomenon from either of deflation or inflation.
Most people think hyperinflation is an extension or amplification of inflation.

It isn’t.

Inflation and hyperinflation are two very distinct animals. They look the same because in both cases, the currency loses its purchasing power, but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency.

Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money —they want less of the currency. So they will pay anything for a good which is not in the currency they have lost faith in.”

I think this is a nice, concise definition and I completely agree with it.  So assuming that there is a repudiation of the USD and an accompanying capital flight into hard assets like commodities, and gold and silver in particular, what would that do to the relative value of the currency of a commodity-producing nation?  Think about it for a moment?

If hyperinflation happens as described above, the result for the Canadian dollar would be a massive revaluation higher against the greenback as the value of our resource base would rise dramatically.  A rising dollar would kill exports except those people are clamoring to acquire, particularly precious metals.

Unless I’m missing something, it seems to me that the net result of a hyper-inflationary event in the US would be rise in commodity currencies, at least in the short term.  This is deflationary, not inflationary.  There’s a chance that at some point there may be a complete repudiation of all fiat currencies, but I believe that will happen well after the events I described above.

Please add your input.  I’m just throwing out a random musing.  To me, I just don’t see how hyperinflation in the US translates into the same here.  Have I missed something?

Cheers

Ben

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8 Responses to Mini post: Will a hyperinflationary event in the US trigger hyperinflation here in Canada?

  1. processdude says:

    I agree with your general sentiment; good, short post.

    If you or anyone else is interested, I’m a fellow WordPress-based contrarian economics blogger, who wrote a piece entitled, “Hyperinflation Following Mega-Deflation? Maybe, Maybe Not…” (at http://anglesoneconomics.wordpress.com/2010/07/27/hyperinflation-following-mega-deflation-maybe-maybe-not/).

    Keep it up.

    Regards,
    Stewart

  2. ATP says:

    Hi Ben,

    Love both you and the Whisperer’s blog (I read both daily). This is a comment I posted on the Whisperer’s site in response to his commentary about hyperinflation that you quoted above. I’d love your (and others’) view on whether my line of thinking makes sense or not. Keep up with the good stuff!

    “Hyperinflation is a social psychological event. It’s a herd mentality event.
    The main underlying psychology is panic. The little guy panics and rushes to the store to stock up on flour, the store owner panics himself and also see a money making opportunity, so he keeps raising prices. The incompetent government keeps printing money to perpetuate the con game. It becomes a self-perpetuating vicious cycle.
    Ironically in the US (and Canada), the oligopoly that dominates the supply of our daily needs may make hyperinflation less likely. While on one hand it would be very easy for the chains to raise prices because of their dominance, on the other hand, it would also be easier for the people, through a hopefully still somewhat functional democratic government, to implement control over them. Also, because of the economy of scale and their privileged status, there would be less of a need for them to panic, unlike the corner store owner who acted the way he did because he felt much more vulnerable in a hyperinflationary environment.”

  3. Bruce says:

    Great post Ben. @ Steward, checked out your blog looks good keep it up.

    My thoughts.

    The US/Canada GDP and inflation has historically shared a strong correlation. Having said that the logic is sound. We haven’t been where we are today and commodities will be in high demand when the US dollar isn’t to an amount that’s almost impossible to fathom.

    Many of the industry contrarians I speak with however don’t mention energy often. It seems precious metals takes the spotlight as a US currency hedge. What are your thoughts on energy vs gold/silver during a US hyper-inflationary environment?

    Also logically it seems to make sense to hold Canadian dollars. As the economy weakens Canadian assets (especially real estate) will be great buys if one has cash (almost no one will). I feel real-estate has a long way to decline before it corrects and at it’s bottom will yield high returns. Cash will be hard to come by (given the depressed economy). This could represent one of the best buying opportunities in over a decade. Thoughts?

  4. I don’t agree with everything in this write-up, but you do make some very good points. I’m very interested in this subject matter and I myself do alot of research as well. Either way it was a well thoughtout and nice read so I figured I would leave you a comment. Feel free to check out my website sometime and let me know what you think.

  5. Toxicosis says:

    Virtually every country of the world who has high or exceedingly high nominal debt will either be forced to print or default. Purchasing power is already over the last eighty years exceptionally eroded. Why with a world population addicted to oil and oil products, which are not as abundant as they used to be 100 years previous, would the cost of maintaining our credit supported living arrangements decrease. They won’t. Demographics point to aging populations in developed countries and a fight for resources in developing countries with costs incurred exponentially especially in health care and pensions. Corporate interests supersede citizenry interests, thus even here in Canada we as citizens cannot claim ownership of the tar sands but oil giants certainly can. Corporate interests have also left much of our manufacturing sector high and dry, selling us their products produced with a fraction of the labor costs back to us which now we too often purchase with credit and not our dwindling disposable income.
    This so called fiat currency binge extended artificial and overbearing consumption which would not have happened without excessive and available credit. Who’s rich? The banks, the government institution(s) for now, and multinational and national corporations. In Canada our deficits will not go away ever, unless by printing or default, due to a production based economy which has for all intents and purposes turned into a service sector economy. Show me the good paying, stable, benefits existing jobs with a low cost of living with savings in the bank, and I’ll show you a sound and healthy economy. But it sure is not this one.
    Hyperinflation is going to destroy all fiat currencies and their economies and citizens within them.
    Oil is going up, and since it’s payed for in U.S. currency at present, our gas prices here in Canada will reflect this severely in the not too distant future. Gold and silver are not going up in price, the value of paper/fiat currencies is going down relative to these forms of wealth. Thus in dollar terms both U.S. and Canada, even without food or oil shortages we will experience persistent and at times sharp rises. Sure home prices will collapse, but a home is not a monetary asset. It is a place to live. If all your money is tied up in four walls, good luck in eating, cause selling that home just like in the U.S., will become delusional at best, and most impossible at worst. Either it is sold at a loss, or the bank takes it from you, or you sit in a payed off home, see your property taxes rise, food and home heating, electricity, and gas prices go up and hope you have enough liquid cash to afford it all. Hyperinflation is coming, and no Canada nor are currency due to our enormous bills and deficits will escape this. Good luck to all.

  6. Pingback: Deflation, gold, and other musings | Financial Insights

  7. CCC says:

    In Canada

    A years worth of food as of 29 Nov 2010 can be purchased for $500 at Superstore (two trips, with a $25 off when purchasing $250 worth of groceries).

    This includes (but is not limited to)
    400 lbs of rice,
    100 lbs of pasta
    100 lbs of lentils,
    100 lbs of canned fruits, vegetables, and meat

    A few cords of firewood might also be a good idea, as would other alternate heating sources.

    All the gun nuts who are paranoid about a government gun grab are just that – paranoid. With public debt:GDP at 82%, continued commitment to Afghanistan and only 300,000 police officers and soldiers (active and reserve) nationwide it seems unlikely the Federal Government will be able to budget a gun confiscation scheme on the scale of other British Commonwealth countries. Obey the law, get a PAL, get a Chinese manufactured firearm and 5000 rounds of .22 LR while you can still do so for less than $500.

    IMO, it’s a good idea to keep at least 100 oz of junk silver on hand as well for daily expenses.

    The only mystery is paying off the mortgage. That one I’m totally miffed about, but I believe a few gold coins could solve that problem.

  8. Pingback: Inflation, Hyperinflation, Deflation, Stagflation, Screwflation……what’s in store for Canada? | Financial Insights

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