The Threat of Hyperinflation and Why You Should Be Concerned

Published on

If you have visited a car dealership, gas station, or grocery store recently, there is a strong chance you’ve noticed a significant increase in prices. Similarly, if you look into consumer goods, investments, real estate properties, and even utility bills, you will see a huge difference in prices compared to previous years. This unfortunate phenomenon is called inflation.

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2021 hedge fund letters, conferences and more

The definition of inflation has changed throughout the years. Central banks and economists, who support the bank’s monetary policies, will define it slightly differently than its detractors. But something everyone seems to agree upon is that inflation is the loss of a currency’s purchasing power.

What Is Hyperinflation?

Hyperinflation is declared when inflation rates surpass a 50% monthly rate. Currently, the Federal Reserve stated that for September, inflation rose to 5.3%. That number might seem minuscule compared to the 50% rate a country must hit before mentioning hyperinflation. Many top-level investors still fear that's where we are heading. The Fed seems incapable of controlling the devaluation of the dollar after years of unlimited printing.

With the combination of problems that usually hurt the economy on a good year, the world is facing a definite problem. Currently, we have an oil crisis that has stifled production and increased the energy crisis significantly. Secondly, we have a labor shortage, where over 5 million people have not returned to work. Combine those issues with a mounting supply chain issue, and the larger picture becomes clear. This is why economists worry about a possible hyperinflationary crisis reaching our shores soon. Many people believe hyperinflation can't happen in the U.S. but they are wrong. Some of the largest economies of the world have faced this issue before.

Holy Roman Empire's Crisis Of The Third Century

Inflation can come about in several ways. Back in the Roman Empire, there was a period when the Roman government overspent on wars and other expenditures. They tried raising taxes but it wasn’t enough to pay for the empire’s military. The Romans decided to reduce the amount of silver in their coins. When word got out to the public and other nations of this change, the value of the Roman currency dropped significantly.

In reaction to the knowledge of a devalued currency, merchants raised prices and wealth inequality hit record highs. This created a crisis that wrecked the Roman Empire's sphere of influence. From the years 27 BC – 14 AD of Emperor Augustus’ reign, the Roman currency called the denarius, contained 95% silver. By 265 AD the denarius had only 5% silver.

Many price control policies were implemented, and unfortunately, this drove people towards the black market. After years of economic struggle, the Roman Empire couldn’t shake off the effects of inflation. The loss in its currency’s value hurt its military, society, and gave the perfect opportunity to its enemies to make great advances on Rome’s dwindling territory. As a result, the Roman Empire slowly crumbled.

Germany's Weimar Republic Hyperinflation Disaster

Before WW1, Germany’s currency was pegged to gold, giving it a reputation of strong stability. When WW1 broke out, Germany decided to take their currency off of the gold standard so that their central bank could print unlimited amounts of money to fund their war efforts. Germany went from having 2 billion marks in circulation to 45 billion after the conclusion of WW1. Disastrous mistake.

After Germany’s surrender in WW1, the country was left in financial ruin. Due to their defeat, Germany was forced to pay reparations to the Allied Powers. As a result, Germany printed without end, extraordinary amounts of marks to pay reparations and other debts. This brought the nation into a hyperinflationary catastrophe that brought poverty and strife to an already defeated society.

Since the German government couldn't afford to pay back its reparation obligations, France sent troops into the Rhineland and occupied Ruhr. The occupation of Ruhr hurt Germany significantly since a large source of income came from mines that were located in that region. The central bank of Germany continued to print bills uncontrollably. The mark went from 160,000 per dollar to 4,200,000,000,000 per dollar in one year!

Finally, the United States offered a loan to Germany for purposes of paying reparations. The German central bank became a separate entity and created a new currency, the Rentenmark. The production of the Rentenmark was strictly limited. This helped Germany return to a much more stable economy for a couple of years until the Great Depression.


Source: Wall Street Mojo

The Velocity Of Money And Its Effects On Inflation

Another factor that causes hyperinflation is called money velocity. If a significant amount of currency enters the economy at a high rate, you will get a high money velocity rate. When GPD is high and the economy is doing well, you will see higher rates of money velocity. But when the economy shrinks, with high unemployment and higher prices, this is an indicator of hyperinflation.

Many economists overlook the effects money velocity has on inflation. At the beginning of the COVID-19 pandemic, governments and central banks around the world increased the money supply. Then, they froze debt payments and shut down many industries. This led to a significant amount of people beginning to hoard large amounts of money. Once COVID-19 restrictions eased and the economy opened up for business, a flood of money rushed into the economy.

This flood of money overcharged the demand for goods to unprecedented levels. The Fed said that the reason for inflation is a supply chain issue due to the pandemic. He is partially right, but not in the context he is presenting.

The Fed blames the supply chain crisis on shutdowns. Plus, slow recovery from manufacturers due to labor shortages and other issues. Others suggest that the reason why manufacturers are struggling is that they can’t keep up with the extremely high demands for products. If you have a population of people that are hoarding large amounts of cash and credit with nowhere to spend it,  you will have an extreme amount of money flooding the system at once.

This is where you will start to see inflation spikes. As demand increases, supply decreases. This is why we continue to see high prices in cars, real estate, gas, groceries, clothes, electronics, etc... So the higher than normal demand is a significant reason for our energy, chip, food, staff, and shipping crisis.

When Can Hyperinflation Set In And How To Protect Your Wealth Against It?

Inflation rates can compound at an extremely fast pace. As you read above, hyperinflation took less than a year to set in and cause havoc.

The best thing you can do to prepare for the possibility of hyperinflation is by protecting your wealth in assets used to hedge against currency devaluation. Precious metals, like gold, silver, platinum, and palladium, have been used for centuries to protect your wealth. Currently, gold and silver have gained tremendous strength over the past couple of years, as investors look for asset protection. Bitcoin and other cryptocurrencies have also arisen as a new vehicle for hedging against inflation but come with certain risks.


Only time will tell if the US dollar will survive this stint of hyperinflation. In the meantime, protecting your wealth and stocking up on nonperishable foods should be of utmost importance when preparing for an economic downturn. Precious metals have passed the test of time as a means of wealth protection. Diversifying your portfolio with Bitcoin can help you with liquidity. Make sure you plan before the tide comes. It's better to be safe than sorry.