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Today’s entry: What has to happen to take us from the high inflation we’re seeing now into hyperinflation and what’s the best way to prepare for higher inflation and potentially hyperinflation?
Bottom Line: High inflation has been with us since March, there’s no end in sight, and increasingly top experts have been warning that it’s here to stay and, in some cases, worsen. Billionaire star investor Paul Tudor Jones said he views inflation as the greatest threat to our society today. In addition to Jones, hedge fund investors Carl Icahn and Jeffrey Gundlach have specifically adjusted their investment strategies for high inflation. And most notably, because of the significance of the warning, Twitter and Square founder and CEO Jack Dorsey recently tweeted out that Hyperinflation is going to change everything. It’s happening. I’m going to start with hyperinflation. There’s a specific definition that applies.
Hyperinflation occurs when the cost of a product rises by 50% or more on an annualized basis for a minimum of one month. Hyperinflation of any product is extremely rare and to the extent, its existence in our society has been limited to products, not our whole economy. None of us want to begin to imagine what our whole economy entering hyperinflation would mean. That’s what makes Jack Dorsey’s claim all that much more alarming. Dorsey’s a lot of things but he’s never proven to be a fool or just to throw comments like that out there for effect. He is right about one thing. If hyperinflation happened, it would change everything.
Hyperinflation can occur with a particular product due to a severe supply issue or other specific factors. For hyperinflation to occur to an entire economy, especially one the size of ours, it almost certainly would have to be the byproduct of a collapsing of our currency.
Throughout the course of this year, inflation has been about a 50-50 proposition. Producers of goods have absorbed about half of the cost of inflation while passing on about half of it to us. That’s why consumer inflation’s been near 5% most of the year. Gross inflation, however, has been at around 10%. Early this year the biggest factor was the devaluation of the US Dollar. Now it’s about half the result of the value of the dollar and half supply-chain issues, Biden's regulation curbing domestic energy production, artificial demand created through all of the previously passed government spendings is washing its way into the US economy and the higher cost of labor due to shortages.
Currently, there’s no end in sight to any of those factors. That’s why the best opportunity to curb inflation is by not passing new spending in Washington and hoping that the economy can continue to grow and add to the value of the dollar.
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