Why you should stop worrying about hyperinflation

My inbox is swelling with emails from concerned readers telling me that hyperinflation is coming soon. They talk of food prices, Chinese wages, and another round of quantitative easing (QE); some have even mentioned Zimbabwe! They tell me I’ve got it all wrong and that my deflation talk is simply bonkers.

But as informed as many of these arguments are, they are missing one thing: there’s already more than enough money in the system to create hyperinflation. In fact, it could have happened at any point in the last 39 years. But it hasn’t; and today I’d like to explain why that is.

I’d like to show you why QE hasn’t really had any effect on the ‘real economy’, and why you shouldn’t worry that the much headlined ‘QE II’ will bring hyperinflation.

QE is savings, not cash.

Money isn’t just for spending, it’s for saving too. And it’s important to make the distinction. The amount of cash floating around our economy is actually pretty insignificant. Take a look at the first column on the left-hand side of the chart below:

UK savings relative to cash

Data: Lloyds Bank & Bank of England

Even if you add in cash held in bank accounts ready to spend (M1, the next column), it’s still small relative to our total savings (Lloyds Bank: 2009).

To get inflation (let alone hyperinflation), you need to increase the amount of cash available to the man on the street (M1). But when the Bank of England ‘created’ money using QE, that money didn’t become ‘available cash’ for the man on the street.

So where did the money go? Nowhere. It stayed within the nation’s savings and, so long as savings aren’t for spending, that’s where it’ll stay.

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All that QE did was help push up bonds and in turn the stock market too. And after the mauling of the 2008/09, savers were relieved for this little bit of respite. QE cash didn’t make its way onto the streets, and neither will the cash from QE II.

If you want to talk about serious inflation, then QE isn’t enough. For inflation to go hyper, something really desperate has to happen.

We could have had hyperinflation at any point since 1971

Imagine if we all went to our stockbrokers, banks and building societies and demanded to cash-in our savings tomorrow. That’s what happened in Weimar Germany, and it wasn’t pretty. There were people carrying piles of cash down the street in wheelbarrows, cities issuing their own money, and five-ton trucks dumping mountains of cash outside factories every morning for desperate workers to gather their pay.

How could this happen? Only if savers lose faith in the financial system and decide to move their savings to cash so they can buy hard assets.

I’m happy to concede that faith in the financial system is a little bit less than it was a few years ago. I’m also happy to accept that this faith won’t last forever. But I can’t accept that we’re close to what’s needed to make people abandon savings completely. Despite everything that’s happened, we’d still rather hold bank deposits and shares than cash and gold under the mattress.

Gold may continue to rise – and I’ll continue to trade the great yella’ bull market – but ultimately, people still feel that their savings are safe. In fact, in nearly every decade since we left the gold standard in 1971, our economy has had more than enough money (tied up in savings) to create hyperinflation. And yet it’s never happened.

Piddling amounts of QE won’t make any difference until the day comes when savers shift their wealth into cash. They won’t do that until all faith is lost – and we ain’t there yet.

• This article was written for the free investment email The Right Side.
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  • Atchman

    “Piddling amounts of QE won’t make any difference until the day comes when savers shift their wealth into cash. They won’t do that until all faith is lost – and we ain’t there yet.”

    I dont if ‘piddling’ is quite the word I would use! And we may not be there yet – but we are getting very close. I live in Ireland I can tell you that a lot of my close friends and relatives are secretly harbouring grave fears about preserving their wealth. Further, they dont have faith in our banks. The EU, Japan, UK and US all have unsustainable structual debt issues and they are not getting dealt with. Gold is rising for a reason and the reason is mounting fear and a growing loss of faith in paper money and fiat currencies.

  • Bertha Vanation


    You seem to have answered your own question in your last paragraph. Yes true, when faith is lost in currencies we all pile into PMs & commodities and hey presto, hyperinflation, but what makes you think this is such a remote possibility?

    I would suggest that with ZIRP & governments worldwide debasing currencies with no realistic growth prospects, we have fertile ground for such a conflagration. Hyperinflation may not be a done deal but it’s more likely now than for half a century.


  • Jim

    Its all very well talking about the effects of our QE, what about the stupid amounts of money being printed in the US. This is basically keeping world interest rates low and pushing international investors into commodities, which as we all know are going though the roof. The US will definitely have QE2 which will make matters worse. Gold 1293.

    We are already importing inflation and its only going to get worse, hyperinflation is probably unlikely but a CPI in excess of 6% or 7% is very likely.

    What will the BoE do then?

  • Phil


    Could you explain:
    1) Does ‘total savings’ include M1?
    2) What else does ‘total savings’ include? I’m slightly confused, because if everyone were to sell equities alone, surely it couldn’t cause inflation, because the sellers would only be receiving money that was coming out of M1.

  • Bengt

    The total savings element is bonds, shares and savings deposits (not current accounts).

    M1 doesn’t include these savings.

    So my argument is that for QE to cause inflation, then the QE proceeds have to be turned into cash (M1) first off… then released into the economy by people going out and spending the money they’ve released.

  • goldonomic.com

    We’re living the transition fase towards Hyperinflation. This is the fase where savings are high because consumers ‘hope’ prices will come down [deflation propaganda]. As soon as they see prices won’t continue to come down but keep going up, we shall move towards the nex fase = hyperinflation

  • maxtom

    A lot of people said, money week included that ` Qe1` would not be enough to boost the markets. Look what happened from last March!

  • Rajah Brookes

    Prior to Northern Rock no-one thought the UK would ever see a bank run again. It didn’t take much to kick off.

    Frankly I can’t see how we are supposed to live comfortably along a fractional reserve system which depends on not all of us asking for our money at once. Madness.

    Imagine if we taught our children to run their finances like that. Well done for earning £200 this week son. Now use it as collateral to borrow a further £1800. Give yourself a bonus of £800 for being so innovative. Lend the other £1200 out to other people. It’s OK because nobody will ever ask for it back. And even if they do the government will cover your back when you can’t pay up. Do that every week and you’ll be a millionaire in no time.

  • jeremy

    What about UK/US property prices, do they come into the equation of inflation vs deflation at all?
    If property prices crash/stagnate next year, which is looking increasingly likely, what would its effect on inflation?

  • Damian

    Just so that I understand. There is currently enough money in the system to cause hyperinflation, however we need an ‘something really desperate’ to happen. If you look at the ‘swiss cheese’ theory of disasters (you need 4 or 5 holes to line up – one of them being the ‘black swan’ to have a disaster) then we are only one event away from a total loss of faith in fiat.

    Also, with todays hi tech banking/trading, 24 hour news, and the collosal market of currency speculation – hyperinflation won’t take weeks to come about a la Weimar – maybe it will take 24 – 48 hours. My guess is a h-inflation spike. Rather like a dam bursting.

    Pressure backing up since 1971 (also when real average wages peaked) and suddenly it bursts. When will it burst? who knows. I for one, however will be stood out of the way as I’m 90% in hard assets.

  • Auspirit

    Inflation results from a combination of money supply & VELOCITY. When there is a loss of confidence in a currency money changes hands like a hot potato.
    Hyperinflation is the result of a total loss of confidence in a currency. It ends in total collapse.
    While agreeing with the Shadow Stats hyperinflation story I also find the answer of why it will not be equally compelling from Taipan Daily.


    Still I wouldn’t want to be holding my hopes in a savings account!

  • Bengt


    You are of course right about the velocity of money increasing if we head into hyper mode. But being of the deflationary bent, I fear that velocity will continue to slow.

    The day will come when money is shifting like hot potatos, but that seems some way off. But if I’m wrong, a bit of gold seems the obvious hedge.

  • Frank

    Inflation can only occur when both of the following two conditions are met: 1) The consumer is motivated (willing) to pay the higher price and, 2) the consumer is capable of paying the higher price. In the US currently we have a situation where either # 1 or #2 is lacking or both depending upon individual circumstances.

  • Will Richardson

    Hyperinflation happens when supply falls but money keeps being created.

    Weimar Germany lost the Ruhr to the French and Belgian armies, production stopped but they kept being paid, demand over supply increased dramatically as did prices.

    Zimbabwe has had shrinking supply following it’s badly handled land reallocation and massive political problems, money kept increasing and price inflation accelerated…mind you, if money supply had contracted along with food etc supply, mass starvation is a lot worse than hyperinflation.

  • Will Richardson

    We have 2 million more unemployed than vacancies and similar numbers underemployed along with plenty of spare capacity.
    If the QE money had been used to employ the un/der-employed demand, confidence and incomes would grow and private debt could be paid down. We would see a welling up of private wealth not pathetic trickle down.

    Budget deficits balance income/demand so that the private sector can finance it’s net saving.

    Budget Surpluses reduce income/demand/savings.

  • Jim

    I am wondering if the house price boom we had before it started to crash could be an inflation to hyperinflation episode.

    Where lending became a game of trust, where the buyer says what he can (probably) pay and the seller says thank you very much, slipping the commission into his pocket.

    And is there not different forms of inflation? I remember back in the late 1970’s that there was a potato shortage where prices went crazy for awhile.

    So with climate changing rather to quickly for comfort could that produce shortfalls in crops, hence inflation rise.

    Perhaps it might be a good idea to stock up on tinned food and other food that does not perish to quickly?