Many readers have found my thoughts on “hyperinflation” yesterday little abstract (see Hyperinflation - Highly improbable). They want me to elaborate further on why I think that “hyperinflation” is highly improbable in foreseeable future.
I do not mind sharing the bases of my views on this topic.
However, before elaborating my views of “hyperinflation”, I would like to
clarify that when I say “hyperinflation”, I do not mean the term in its literal
sense, because in that sense it makes no sense in the present day conditions.
In the current context, by hyperinflation, we should understand episodes of
sustained high inflation over a period of many months.
To put this in further context, please note that “hyperinflation”
is generally used to describe situations where the monthly inflation rate is
greater than 50%. At this rate, an item that cost Rs1 on January 1 would cost
Rs130 on January 1 of the following year. At least, in past few centuries,
there is no instance of a global episode of hyperinflation. In the first half
of 20th century there were few localized episodes – the most famous
being Germany (1922-23) and Hungary (1945-46).
In past 70yrs, Peru (1980s), Venezuela (2014-16), Yugoslavia
(1989-1994), Armenia (1992-93), Turkmenistan (1992-93) and Zimbabwe (2004-08)
have seen episodes of hyperinflation. It is conspicuous that all these episodes
resulted from either geopolitical reasons (war or collapse of extant political
order) or civil unrest within the country resulting in collapse of political
and/or financial system. Most of the countries facing hyperinflation were
either closed economies or were facing global trade restrictions or
disruptions. Besides, all these economies were too small to impact global
economy, trade and commerce in any significant measure whatsoever. It would
therefore be totally unfounded to expect that hyperinflation could strike a
major economy of the world like US, EU, Japan, China, or India in foreseeable
future.
Insofar as the probability of the episodes of sustained high
inflation occurring over a period of many months in a major economy is
concerned, I believe that the chances of that are almost Nil in short to medium
term (1-10yrs), unless a major war or civil war breaks out involving some major
economies of the world, causing sustained disruption in the global supply
chain. The bases of my belief, as stated below, are simple and mostly
intuitive:
·
Unlike in 20th century, the global
trade and commerce is now mostly dematerialized. The material, money, and labor
move digitally. The rebalancing of demand and supply equilibriums is much
faster and efficient than before.
·
Demand elasticity for most products, including
food and energy has increased significantly. Alternative products and sources
of supply are available to mitigate the impact of any supply shock.
·
The discretionary demand dominates the
consumption in most of the developed and large developing economies. The
inflation for discretionary products, like electronic gadgets, personal care
services, etc. is already high. A large part of global consumption (in value
terms) may not be essential and could be scaled back with small effort, without
having any substantial impact on human life or global order.
·
The productivity of essential goods, like food,
energy, clothing etc has significantly increased in past five decades and there
is enough inventory of essential goods in the world to mitigate the impact of
any supply shock due to natural calamity etc.
·
The global trade and commerce is much larger,
faster and easier as compared to five decade ago. An episode of higher
inflation due to supply shock is not likely to last longer.
·
The global economy is significantly more
integrated now as compared to first half of 20th century. The impact
of higher inflation in a major economy is more likely to spill to the global
economy rather swiftly. Hence, it is highly unlikely that supply shocks in a
major economy will remain unattended by global trade partners for longer
periods.
·
Given the technology and advancement in the
weapon systems, the chances of a prolonged war between major global powers are
next to NIL.
·
The “tons of money” that we are bothering about
is actually not physical money. Most of it is ‘bytes of money” or digital
money. If need arises, this can be destroyed as easily as it is being created.
In fact, I firmly believe that all the money created by central bankers of
developed economies in past 12years shall be destroyed by the central bankers, as
soon as it threatens to spark unwanted inflation.
·
There is enough spare capacity of productive
infrastructure and housing, etc. in large economies to absorb excess liquidity
of money. I believe that US$1trn of additional flows could be easily absorbed
in Indian economy in one month, without stoking inflation of essential items.
Insofar as the reflation of depressed commodity prices (many
like Zinc and Nickle have traded below cost of production for many months) is
concerned, it is not something to worry about. If at all, it may actually be a
cause for celebration as it would signal normalization of the global markets
and may mark reversion of extraordinary monetary efforts made in past 12years.
Terming this as “hyperinflation” and rushing to the “safe havens” like gold
etc. to safeguard from it would actually be quixotic, in my view.
