Hyper-inflation is here

Last weekend, the MacroBusiness New York bloggerspondent, Rotten Apple, mounted an interesting critique of the dominance of neo-liberal economics in the face of mounting evidence to the contrary.  It details the hypocrisy of our times: how a global debauch by the financial sector — one of the most irresponsible collective acts, or thefts, ever seen — has “mysteriously morphed into a sovereign debt crisis”. And then the so-called financial conservatives (conserving what, exactly?) argue that unless governments cut back spending we will get hyper-inflation. I would argue that we already have hyper-inflation, but of a peculiarly twenty first century variety, and it has nothing to do with governments, and everything to do with out of control financial markets fuelled by the neo-liberal circular arguments. In fact it was only the less developed, very definitely non-neo-liberal China, that probably stopped us from losing the financial system entirely. Because they do not have this problem of hyperinflation.

What do I mean? Consider some of the excesses in the monetary system. About $4 trillion a day is transacted in the global capital markets, according to the Bank for International Settlements. About four days trade equates with US GDP for a year. The US’s various deficits equate with just a few hours trading.
The global stock of derivatives stands at $600 trillion, about three times the financial assets of the world, according to estimates from McKinseys (that does not include land). More than half the trade of stocks on the US share market is high speed, algorithmic trading.
Derivatives, computerised foreign exchange trading and algorithmic stock market trading are all “money” – it is not possible to distinguish between them and other forms of money in any meaningful sense — and they are thoroughly out of control. How is this not hyper-inflation? Almost all the analytic focus, understandably, goes on the conventional measures like credit, money supply (although even the Fed has stopped measuring some aspects of that), equity levels, asset prices and fiscal and trade deficits. But there is a whole level of “meta-money” above that which dwarfs the conventional forms of money and which continually threaten to undermine the very basis of the monetary system. At the very least they create the kind of distortions that we are now seeing, resulting in polices like quantitative easing. Indeed, the irony at the moment is that the hyper-inflation of meta-money has created a dearth of more conventional money. The dangerous trend is that the hyper inflation at the top level is taking over.
Interestingly, Myron Scholes, who was behind the Black and Scholes method of pricing risk that led to the explosion of derivatives thinks some of the meta money should be blown up. As Time reported:

Scholes knows. Not only he is the Nobel Laureate and the father of Black-Scholes, he also ran LTCM that blew up for the very same reason in 1998. Cancelling contracts while things are good seems to be an excellent option. The reason for a complete seizure of the libor market was the market pricing of couterparty risk. It happened before, and it can happen again. The notional size of derivatives market is 10 times the size of the global GDP, and the usual Central bank liquidity fix will only make it bigger.

It is worth asking what money is; start from some basic definitions. Money is rules, it is not a tangible thing (you cannot have a “shortage” of capital, it does not “flow” around the world etc.). More importantly, you cannot deregulate rules. it’s a logical nonsense. Sp when Western financial systems were “de-regulated” in the 1990s what really happened was that there was a shift from government setting the rules to traders setting the rules. The rules exploded: CDOs, CDSs, volatility hedges, etc. etc. It created hyper inflation, too many rules.
The only solution is for government to reign in these lunatics. Re-establish some sanity in the rules of money (that will have to happen anyway if we have another GFC and the whole thing collapses). Forget fiscal austerity. It is time for governments to govern. This hyper-inflation of meta money remains extremely perilous. It is doubtful that the world economy can recover from another crisis. The GFC did not bring down the system last time because there were some government tools available, and China, which does not even have all the more conventional form of money (such as bonds), let alone the meta money excesses, proved to be a circuit breaker. But there will not be a second chance.
Three things should be done:
1. A small tax on cross border capital flows, which would stop the forex casino in its tracks;
2. A small tax on derivatives, which would mean it would return to what it is for — such as hedging wheat contracts or commodity contracts — rather than debt driven gambling;
3. Some kind of minimum trading period on stock markets to stop the rocket scientists spreading their algorithmic poison into the equities market.
Governments, instead of worrying about removing financial support for the weaker in society in the name of balancing their books, should start doing some governing.
And the good news? You can buy inflation linked derivatives. But I don’t think you can buy hyper-inflation linked derivatives.
Latest posts by __ADAM__ (see all)


  1. Interesting and relevant perspective; and some good thoughts on regulation (though the regulation itself could force meta flows into the real economy, creating real inflation problems.

    I believe the underlying issue is, honestly, that the status quo is too ingrained, and we are, really, too late….oh, pessimist, me!

    But I think it’s more realistic than it is pessimistic….

    A good article, thanks.

  2. Nice. Your definition of money is the best I’ve read just about anywhere.

    Two points though;

    While contemporary ‘money’ is as you say, “Derivatives, computerised foreign exchange trading” etc, in reality they remain credit & so are only as ‘money’ as the next fool to accept it. True money is what extinguishes debt, it cannot be debt in & of itself.

    I also disagree with your statement that “it has nothing to do with governments”. If you take the time to examine the RBA’s open market operations you will find the source of the problem. The “hyper-inflation of meta money” is only possible as long as the government can pass of its credit (to the next fool) as ‘money’, thus ‘bailing out’ the system as required. Government credit is of course the $ itself, being the obligation of the RBA (wholly owned by the government).

    As I’ve stated here before, the real trouble starts when the sun begins to shine on hyper-inflation of the meta-ist money of all.

  3. Huh? If I bet $10 per minute on the toss of a coin, the total money volume would well exceed my income. However, that “transaction” volume doesn’t create either capital or money. And so, it is not inflationary.

    Inflation is caused by money creation, either through increasing debt-money, via fractional reserve banking, or by increasing paper-money, though central bank printing.

    I don’t disagree with your conclusions though – I just see them as solutions to the “bloody big gambling” problem, rather than an inflation problem – which is still on the way…

  4. Yes, good point JMD. When I said it had nothing to do with governments, I should have said it has now been taken out of the hands of governments because of their abrogation of responsibility, the very abrogation that you describe. Having given up, governments are now very much weakened when it comes to fixing the mess. And yes, David, it is a “bloody big gambling problem”, gambling with the monetary system itself. That is the real price of neo-liberalism.

    • Can’t quite agree with you even there Sell.

      I’d say that governments have their hands tied as to what they can now do – the government cannot just withdraw its ‘support’ (actually yours, since you accept $ in payment of debt), since that would lead to the financial system being unable to meet its obligations.

      However, I wouldn’t say they aren’t doing anything, on the contrary, government is selling debt hand over fist to supply the financial system with ‘super meta money’ (I’m utilising your definition there, as it’s not really money but debt).

      Total government debt has now reached unheard of levels, far greater than even in 1997. You might recall that 1997 was when Howard & Costello sold 2/3rds of the nations gold reserves. You might also recall that 1997 was the onset of the Asian Financial Crisis when the credit of various ‘sovereigns’ to our north went down the toilet?

      The credit of ‘sovereigns’ is not like Wonder Warthog – indestructible. In fact the last time the government attempted to bailout everybody, 1991 through to about ’95, it lead to certain issues in 1997 that only gold could address, but the gold is now mostly gone & what remains is actually with the Bank of England, maybe.

  5. It is all credit, (contingent credit in the case of derivatives).

    It has grown in an uncontrolled fashion for 30+ years. i.e. the inflation already happened.

    Why? Because credit was priced by central command (i.e. central banks in the thrall of the Monetarists and egged on by the Keynesians), instead of by the market.

    Of course, for every credit there is a corresponding debt. The only way for there to be a hyperinflation is for governments to replace private debt with government debt, and then to “print” excessively to cover that debt.

    The bigger government gets, the bigger the parasites (big business and finance) attached to that government. If you want to rein in bad behaviour by big business and big finance, you need to rein in the size of the government.

  6. Something which shows no effect on prices for goods and services is not inflation, hyper or otherwise. Misusing the term ‘hyperinflation’ provides a catchy title, but also massively misleading.

    Given the problem in both the US and Euro-bloc with excessively tight monetary policy, misusing the term like that is like shouting “fire!” in a crowded cinema.

    If you want to talk about Credit bubbles, or whatever, fine. But please use vaguely sensible terminology, not something that feeds into the nonsense of the inflationphobes and fosters bad monetary policy. Particularly as some aspect of that monetary policy appears to be directed to injecting moral hazard into the financial system to feed/protect the very thing you are complaining about.

  7. Lorenzo, I have a problem with “vaguely sensible terminology” because, to be technical, it suffers from an extreme positivist bias. Ask the question: what is money? Rules. It is not a “thing” (it doesn’t “flow”, you can’t have a “shortage” and above all you can’t “de-regulate it”, because you can’t deregulate rules). Most of the economic theories are just circular arguments derived from those rules. What has happened is that governments gave up the responsibility to set the rules, allowing traders to make up their own. So the rules exploded in number and quantity.

  8. “3. Some kind of minimum trading period on stock markets to stop the rocket scientists spreading their algorithmic poison into the equities market.”

    70%+ of NYSE volume is algo/automated.

  9. “The only solution is for government to reign in these lunatics. ” Problem; the lunatics own the government.

  10. It is quite absurd to confuse aggregated trading with monetary aggregates and suggest that the big increase in trading constitutes hyper-inflation. By that measure you would say that we had deflation in houses last year, despite prices rising by 20%, because house trading transactions fell 20%.

  11. Sarah, you are confusing the transaction at the coalface: i.e the reduce number of housing sales with the totality of the money moved.

    The buyer had to borrow money, that money had to be raised in the wholesale market, then hedged (because probably half was raised overseas), with more money, then it was probably securitised into an RMBS, which was then traded a half thousand times by traders, which then was reflected in the share price of the bank, whose equity is exchanged by traders many times A YEAR.

    Are you saying there is no risk is having an ever increasing amount of monetary traffic (e.g the trillions in CDS, CDO and other toxic derivatives) reliant upon an ever increasing amount of traffic (i.e liquidity) at the commercial/trading bank level?

    Sell on News is quite right: money has morphed into a gambler’s set of chip because governments have dropped the ball in regulating what money and what capital is and is not.

    The vary definition of hyper inflation is a loss of trust and confidence in a currency: where is the trust and confidence in trillions of opaque transactions that provide nothing but the chance to upgrade from a BMW to a Maserati for the faceless algo traders out there?

  12. Money is what government will accept in extinguishment of a tax liability. In a fiat currency world, that is where money ultimately derives its value from. As a corollary, if government loses its power to enforce taxation (for whatever reason) money loses its value and hyperinflation ensues. Thus in Zimbabwe, the government destroyed the sectors of the economy that provided most of the country’s wealth, leaving millions unemployed. The government could no longer extract tax from the farmers (because they no longer owned the farms) or from the workers (because they didn’t have any income), so the huge amounts of currency the government printed became worthless (nobody would exchange it for anything of value). Similar problems afflicted the Southern states in the US civil war.

    Bottom line is, if the government retains the power to tax, and someone has the capacity to pay, hyperinflation should never happen. I therefore vote for financial transaction taxes (maybe restricted to cross border transactions, as proposed by SoN) as a Very Good Idea.

  13. Good definition of money.

    One problem when talking about inflation is that there is monetary inflation and there is price inflation (both legitimate definitions to me) and people confuse the two quite regularly.

  14. Me – absolutely right.

    This is why people get confused about prices going up at a point where so called ‘inflation’ (=monetary inflation) is not happening.

    We’re seeing a lot of price inflation at the moment – geopolitics, expectation of inflation leading to speculation, extra consumption, etc.

    But we’re not seeing REAL price inflation in line with the amount of money that has been generated out of nowhere by central banks. Not YET anyway.

    And after all, if you were in a position to grab some of that printed money and hoard it away somewhere, would you go out and spend it immediately, knowing that doing so might cause price inflation and a drying up of that ‘free money supply’?

    No, you’d squirrel it away and keep those hands clasped together and encouraging central banks to keep on going…

    Of course, the second someone starts to spend some serious cash then we’re all f**ked. But it will happen very slowly and stealthily. By the time most people realise what is going on it will be too late.

  15. As best as I can determine it it was the finance sector that caused monetary inflation via the $600 trillion of derivatives and other financial instruments. In 2007/2008 they were no longer able to juggle them anymore as there were simply too many in the air and the balls started to fall (deflate) and that caused the financial crisis. What the central banks did was to throw the balls back in the air by adding more balls via their monetary inflation. The problem as I see it is that that there are more and more balls getting thrown up and you can only juggle so many and for so long. Eventually there will just be too many and they will fall. And then the real trouble starts.

    The central banks should have just let the balls fall when there were less of them (although $600 trillion is still an awful lot). But now that there are even more of them in the air the damage will be worse. And by dragging the government into it and therefore, by default the taxpayers, we are all going to get hurt. As always, it’s the cover up that’s often worse than the original crime.

    • Central banks ‘monetised’ the ‘assets’ of the banking system by both buying outright & loaning against these so called assets. Effectively they put a backstop bid under the entire ‘corporate’ or ‘private’ money market.

      This is why Sell has hit the nail on the head with his definition. Contemporary ‘money’ includes many forms of credit, including the $ itself, the $ being the obligation of the RBA & thus the government & ultimately you.

      However, as with any credit, it is only as ‘money’ as the next person to accept it. Another way to think of it is that the ‘moneyness’ of credit is a dynamic process (thanks to Doug Noland, http://www.prudentbear.com).

      Think of a cheque, if you can cash it at the bank it is ‘money good’, a monetary equivalent. If it bounces, the cheque is worthless, like a Zimbabwe dollar.

  16. An interesting post. Putting aside your unconventional definition of hyperinflation, I do like your point about the forex casino, etc, and agree that a modest tax on some of these activities would not be a bad idea. The growth in trading volumes of FX, derivatives, etc really is quite staggering, and it can only be destabilizing.

  17. What sort of inflation is caused when there is a sudden surplus of money?

    Say for instance a commodity lets call it feore is traded in a currency lets call it sorbent. Then suddenly those who want feore decide to use their own currencies rather than the third party one (sorbent) and begin trading feore in yuan and rupee. Then the same thing happens with other commodities like oil. What then happens to all the excess sorbent? and what effect does this have?