I have a list pinned above my desk of things I want to write about when I get around to it. Over the summer I added “coming hyperinflation in Iran” to the list in capital letters. Sadly, the market has beaten me to it.
This week, the collapse of the Iranian rial hit the mainstream news. It has been falling since the US and the EU imposed sanctions in 2010 but in the past few weeks that fall has accelerated and the usual side effects of rampant inflation have been reported.
Consumers are stockpiling food; suppliers are holding back inventories to keep ahead of price rises; high value items are quoted in dollars; and angry citizens are protesting in the streets.
A few weeks ago this was just very high inflation. Now, according to Professor Steven Hanke of John Hopkins University, it is officially hyperinflation, the accepted definition for which is prices rising at more than 50% a month. In Iran, says Hanke, prices are rising at about 69% a month.
Notwithstanding the horrors this is causing in Iran, it must be extremely irritating for Hanke. Why? Because in August he released a paper with his colleague Nicholas Krus called World Hyperinflations. It has been three years in the making and lists 56 incidents of hyperinflation since 1795 (France). Had they left it a few more weeks there would have been 57.
The paper is worth reading purely for historical interest. But it is also relevant now, because while we tend to think of hyperinflation as an extreme event, it is actually fairly common. 47 of the 57 (I’m adding Iran) occurrences have happened since 1944.
There’s clearly been a bit of border shifting, but nonetheless this suggests that over 20% of the countries in existence today have suffered hyperinflation relatively recently. A good many others will have seen prices rising at rates we would consider shocking but do not quite qualify to for Henke’s list (remember, prices could be rising at 49% a month and it wouldn’t cut the mustard).
Add that to the reminder from Iran that inflation comes first slowly and then very fast, and you may already be wondering about the implications of quantitative easing (QE) in the West – and the growing suspicion that today’s money printing will be tomorrow’s inflation.
I’m not suggesting that hyperinflation is around the corner for the West. Most economists argue, rightly, that central banks are only responsible for a small percentage of most countries’ money creation. The rest comes via credit creation by our commercial banks and at the moment these are mostly contracting rather than expanding lending. That means overall money supply is barely expanding fast enough to prevent deflation, let alone create inflation.
At the same time, stable countries with liberal and diverse political institutions should be capable of preventing monetary crises. But it is worth remembering the message that ‘QE infinity’ (the limitless QE pursued by the Fed) and near-zero interest rates are sending you.
They tell you your cash is all but worthless. It doesn’t deserve a real return and it has so little intrinsic value it can be created in vast volumes at the touch of a button. The point to keep in mind is that there are two variables at work when it comes to monetary inflation. The first is the supply of money. The more money, the more likely prices will rise. The second is the speed at which money moves around the economy.
This is the bit to watch. It can rise for two reasons. The first is rising confidence – people think things are improving fast and start to borrow, spend and invest in response. Fat chance of that right now. The second is falling confidence. People look at the money in their hands and wonder if it will be worth as much tomorrow as it is today – if it is an effective way to store the fruits of their past labour (that’s all money is, by the way, a store of effort). They think it might not be and start buying hard goods. Money moves faster; demand and prices rise.
At the moment the inflation bias message of ‘QE infinity’ is one that only those at the top of our financial pyramid are really hearing; hence their frantic efforts to exchange cash for something, anything, with a real yield. The message might filter down before long, giving us, eventually, more of a currency crisis than we already have and high inflation. Or it might not. But surely the mere possibility is worth hedging against – with gold, which hit a year high this week.
If you don’t have a small holding, you might want to look at Hanke’s paper and, while marvelling at the fact that prices doubled every 15 hours in 1945 Hungary, wonder if you shouldn’t. Those of you interested in more risk might look at some of the Aim-traded gold miners. A note from First Columbus Investments points out that while the gold price has risen 190% since 2007, the price of shares in the smaller gold miners has not risen at all.
• This article was first published in the Financial Times.