Printing money does not cause hyperinflation

“With all this money we are printing, hyperinflation is going to nail us sooner or later.” — We have heard it said so many times now that the correlation of printing money to subsequent hyperinflation has become accepted as a common truth. It is not.

There is an interesting aspect of human behavior that enables us to believe something, almost anything, as true if we simply hear it enough times. Certain media outlets capitalize on this phenomenon in spades, and it is a rather effective tool whatever your agenda — if you are anti a certain viewpoint, or if you want investors to load up on illiquid precious metals. I’ve even been heard saying that printing money leads to hyperinflation, duped into blindly believing this common truth. One of my favorite writers snapped me out of it a few days a ago.

James Montier of GMO wrote a paper recently, Hyperinflations, Hysteria, and False Memories, and artfully exposed the truth about hyperinflation. I’ll spare you the full read, although you would have no difficulty following it if you took economics in high-school or college. In the first part of the paper, he deconstructs the traditional view of hyperinflation: that budget deficits and printing money lead to hyperinflation; then lays out an alternative view: that hyperinflation events are triggered by large supply shocks, in the presence of large foreign-denominated debts, with an accompanying transmission mechanism. Budget deficits and monetary printing are then caused by hyperinflation, they are not the source of hyperinflation.

The second half of the paper walks through 8 actual hyperinflation events since 1922, revealing the cause of each as large supply shocks, not printing money.

Why is this important?

There is no question that hyperinflation is a rare but huge potential threat to our economic livelihood as a family and community, and huge economic threats need to be watched so we can take appropriate action. But we better be watching the right thing, otherwise will miss the cues and take inappropriate action at inappropriate times. Printing money is not the right cue for hyperinflation. We need to stop saying that it is, so we can begin watching the correct cues for this and other risks.

To say that the printing of money by central banks to finance government deficits creates hyperinflations is far too simplistic (bordering on the simple-minded). Hyperinflation is not purely a monetary phenomenon. To claim that is to miss the root causes that underlie these extraordinary periods. It takes something much worse than simply printing money. To create the situations that give rise to hyperinflations, history teaches us that a massive supply shock, often coupled with external debts denominated in a foreign currency, is required, and that social unrest and disruptive conflict help to transmit the shock more broadly.

On the basis of these preconditions, I would argue that those forecasting hyperinflation in nations such as the US, the UK, or Japan are suffering from hyperinflation hysteria.

-James Montier