Skip to main content

Hyperinflation and the bond markets

Here's one for all you economic philosophers and "bond market vigilante"-types. The question I'm currently turning over in my mind is this: can the U.S. experience hyperinflation, or will the possibility of such an extreme inflationary spiral be held in check by the bond markets?

The current thinking on the possibility of the United States experiencing hyperinflation seems to be split between those who say it can (and likely will at some point in the future), and those who feel it cannot, for precisely the reason stated above.

I spent part of the weekend reading some of Richard Russell's recent remarks, and part of his June 20 newsletter dealt with this very topic.

Russell is of the opinion that, as far as hyperinflation goes, "it can't happen here" because of the size and depth of our present-day bond market and money markets.

He also feels that if inflation were to really heat up, the bond market would "start to crumble" and things would generally start to fall apart. Interest rates would go higher, the stock market would collapse, and business would begin to fall apart. This in turn would cause inflation to disappear as all manner of assets begin to deflate, or so the story goes.

While I hold Richard Russell and his writing in the highest regard, I must say that I have to wonder about his reasoning on this issue. I am just not sure that I would agree with it.

I am still struggling with the answer to these issues, but something about this argument strikes me as rationalization. So we have a very powerful and well-developed bond market. Does that mean that it would survive the final stages of a rapidly escalating inflationary cycle or keep such a cycle at bay?

The theory of the bond market vigilantes holds that bond traders will sense inflation and mitigate its effects by pushing interest rates higher, thereby keeping central banks and governments relatively honest.

The main problem with the theory of the bond vigilantes these days is that no one can seem to find them. Whether they've been overrun by non-traditional forces or have simply disappeared has been a recurrent theme for discussion in recent years.

I've heard some very insightful arguments concerning the bond vigilantes and their eventual return, but I've yet to read of their ability to stop an impending hyperinflation in its tracks.

Also, if the government were to issue bonds in excess of the amount people were willing or able to lend, they could simply monetize the debt by selling their bonds to the central bank, who, in turn, would print the money needed to pay for them.

Creating money out of thin air is, of course, an inflationary exercise. Taking this method to its extreme would provide the impetus for a hyperinflationary episode.

So far I've seen nothing to suggest that bond investors, or anyone outside of governments or money-controlling agencies, have the power to overcome an over-issuance of money and credit, or an impending hyperinflation.

In the meantime, if anyone can tell me (in plain English) why the bond markets have the power to stop a U.S. hyperinflation in its tracks, I'd be interested to hear the explanation.

Popular posts from this blog

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance, I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart.

So here's what a real stock market bubble looks like. 

Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ$BCORpic.twitter.com/xjsMk433H7
— David Shvartsman (@FinanceTrends) February 24, 2015
For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan, turned to rubble.

As detailed in our post, "Round trip stocks: Momentum booms and busts", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months. 

In a pattern common to many parabolic shooting stars, the stock soon peaked and began a…

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL! 

Please bookmark our new web address at Financetrendsletter.com

Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner.  



Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead!

As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter. You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter). 

Stay up to date with our real-time insights and updates on Twitter.

Moneyball: How the Red Sox Win Championships

Welcome, readers. To get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter.

The Boston Red Sox won their fourth World Series titleof the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,John W. Henry(with his partners)bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.

This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job off…