Merryn's Blog

The threat of hyperinflation in Europe

Hyperinflation rarely happens in ‘coherent and cohesive’ societies says GMO’s James Montier. Unfortunately, Europe is neither of those things.

I interviewed GMO's James Montier last week. Subscribers can read the full interview in the magazine on Friday, but there is one bit I couldn't quite fit in Montier's views on hyperinflation. He isn't much worried about it in most places (it rarely happens in "coherent and cohesive societies"), but the one place where he suggests there might be risk is in Europe.

Economists, he says, generally forget that "their subject is not economics, it is political economy". Look at Europe and you can see that under economic rules it should have split already, but the politics of the eurozone mean that "economics is a slow burn force" there. That suggests that it could "trundle along for another decade" in a miserable state of low growth. It might then accept the need for fiscal transfers that would help.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Quantitative easing (QE) wouldn't be a bad thing either it will at least stop bond yields in some countries crippling them. The problem is that while bond vigilantes are irrelevant in the UK, US and Japan (see the full interview for more on this) they are all too relevant in Europe, where there is still no real state-backed bond buyer of the last resort and there is therefore real credit risk.

QE can change that and buy the Eurozone some time. What it can't do, however, is solve its problems.

Advertisement
Advertisement - Article continues below

In the end there will be a break up, and then there could easily be hyperinflation. Look, says Montier to all previous breakups of monetary unions: the Russian Federation, the Hapsburg Empire, etc. "One of the underestimated costs of eurozone disintegration is hyperinflation."

There's more on the history of this here.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/investments/bonds/government-bonds/600738/keep-an-eye-on-swedens-interest-rates
Government bonds

Keep an eye on Sweden's interest rates

Could Sweden be poised to return to negative interest rates?
31 Jan 2020
Visit/economy/uk-economy/brexit/600739/boris-johnsons-big-brexit-plan
Brexit

Boris Johnson’s big Brexit plan

The prime minister needs to get Brexit done, and get the economy growing – particularly for first-time Tory voters. Can he manage all that while negot…
30 Jan 2020
Visit/520380/investors-neednt-fear-the-rise-of-europes-green-parties
EU Economy

Investors needn’t fear the rise of Europe’s green parties

Green parties across Europe are finding the centre-right to be natural allies. That will be great for business, says Matthew Lynn.
12 Jan 2020

Most Popular

Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/investments/investment-strategy/600772/just-five-assets-matter-for-investors-portfolio-asset-allocation
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019