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Hyperinflation: The Nightmare That Will NEVER Happen

On this day in 1923, Jason Zweig of The Wall Street Journal notes, hyperinflation gripped Germany as “workers are paid twice a day and rush out at lunch hour, shoving wheelbarrows of money through the streets in panic.”

That could happen here right, where hyperinflation is on the march? The U.S. is at real risk of becoming the Weimar Republic — or Zimbabwe — according to some.

Well … no.

You see, for all the bluster over the specter of inflation or (gasp!) hyperinflation thanks to loose monetary policy, prices remain very much under control. That’s not my opinion — that’s the math and the data talking.

The reality is that the nightmare scenario of rapidly rising prices has not come to pass — and I’d wager it will NEVER happen, no matter what the goldbugs and Fed haters would have you believe.

Bottom line: Hyperinflation hysterics are overblown, and investors need to ignore these kinds of scare tactics. Here’s why.

Inflation Is Not a Current Problem…

First, let’s look at the current situation. Every indicator shows that inflation is not a concern right now.

The latest Producer Price Index released Wednesday showed the first rollback in the input costs in two years. And on the household level, consumer prices are predicted to increase just 2% this year — the latest in a long line of very modest price increases. Consider these numbers:

  • 2008 — 3.8% annual rate of inflation
  • 2009 – -0.4% annual rate
  • 2010 — 1.6% annual rate
  • 2011 — 3.2% annual rate
  • 2012 — 2.0% annual rate (forecast)

That’s historically quite comfortable. Take a look at this chart, crafted with historic data from USInflationCalculator.com and you’ll note we are well under the average rate of inflation in the last 25-year period.

Inflation Chart

… and Modest Inflation Isn’t a Bad Thing

Some may step in right here and point out that even a 2% annual rate is bad. After all, an erosion of any pricing power doesn’t sit well with many folks. But it’s an oversimplification to state that inflation is categorically bad.

Here are some positives:

  • Falling prices hurt consumption: When inflation is low — or worse, in negative territory known as “deflation” where prices are dropping — people don’t spend. There’s no “incentive” to buy now before prices increase. If you doubt the horrible truth of this, just read up on Japan.
  • Modestly rising prices help consumption: The inverse is also true; rising prices give businesses and consumers incentive to buy. If you doubt the effects of inflation on consumption trends, check out this 2011 article from The Wall Street Journal with the apt headline “Companies Stock Up as Commodities Prices Rise.”
  • Inflation controls wage costs: Here’s an ugly reality: If the rate of inflation is 2% but nobody gets a raise … well, your employer just “cut” its payroll by 2%. No corporation could ever get by with an overt wage cut, but in lean times inflation keeps payrolls in check and helps boost corporate profits.
  • Inflation makes debt cheap: Consider Google (NASDAQ:GOOG), which offered $3 billion in debt about 18 months ago. Its three-year bonds offered a paltry 1.25% interest rate — half the current rate of inflation. On the consumer level, the same is true for well-qualified borrowers. A 15-year fixed-rate mortgage is hovering around 2.8% interest right now … that’s literally free money!

There are downsides, yes — but like it or not, it moves the needle on economic growth.

A History of Hucksters and Chicken Littles

The fuzziest area when we talk about hyperinflation is, of course, predictions about the future.

I don’t like to cast stones at my fellow soothsayers and prognosticators out there … but I will anyway. Note this Shadow Government Statistics report from December 2009 and this Paul Farrell piece predicting Dow 6470 from July 2010 as two rather hyped-up examples. A window of about three or four years seems ample time to prime the pump on those predictions.

I have nothing wrong with incorrect predictions. I am inherently in the business of fortunetelling, in regards to investment opportunities. Sometimes I get it right, and often I get it wrong. But if I’m wrong, I try to admit it … not double down year after year with the same argument.

Even worse is when folks like Glen Beck peddle fear in order to pay the bills via gold advertisers or other investment schemes. The biggest scam ever perpetrated on conservative investors is the idea that gold is a “store of value” and a bulletproof inflation hedge — and there are all manner of shady characters are out there trying to make a buck off your fear-driven hunger for gold and it’s theoretical security.

Disreputable “analysts” and greedy salesmen prey on every corner of the financial markets these days. Don’t think for a second that somehow inflation and the gold peddlers are any different.

Central Banks Work

If that last part didn’t infuriate you, I’ll throw this grenade out there: Central banks work.

A common warning cry is the risk of 1970s-style “stagflation” where we see no economic growth but soaring prices. But the 1970s’ price spirals are not happening — because we learned from that debacle.

A reader’s digest version is that a timid central bank refused to raise rates significantly for fear of hurting a struggling economy — but ultimately Paul Volker was forced to institute draconian measures that plunged the U.S. into a harsh but short-lived recession followed by “The Great Moderation” that lasted for more than two decades until the financial crisis.

So we know what doesn’t work. And if we make a mistake … well, we know how to correct it.

It’s also worth noting that that many alarmists were warning of a second Great Depression due to deflation in 2008 … but the Federal Reserve rightly steered us on a path to mitigate pricing drops and keep consumer demand as strong as possible in those hard times.

Fed Chairman Ben Bernanke is a self-professed student of the Depression’s causes and of central bank history. We should trust him to do his job.

The World Is Not Black-and-White

One final note: I am not an “advocate” for inflation. I am not an apologist for Ben Bernanke and the Fed. There are legitimate problems — too numerous to get into here — with our bureaucrats, our current policies and perhaps even our current political system.

But I try to always keep in mind that in this complex global economy, there are trade-offs we need to make. Sometimes you have to give up something to gain something else.

The bunker crowd thinks the world is a zero-sum game — that if you give ANYTHING up, you are a loser. So they stockpile the canned goods, gold and firearms … and they just dare you to come take anything.

And you wonder why we have political gridlock and a nation that, generally, is too stubborn to compromise.

I don’t pretend the current situation is perfect. But I refuse to buy into the idea that either we settle for hyperinflation or we abolish the Fed.

There is a middle ground. And if you look at the data from the past few years, we appear to be navigating that middle ground rather nicely.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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