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.
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?