Felix Salmon

There are those who believe that the length of a mathematical paper is inversely proportionate to how interesting it is. Something similar can be said about the new paper — short and absolutely first-rate — from Steve Hanke and Nicholas Krus, entitled “World Hyperinflations“. It’s technically 19 pages long, but the first 12 are basically just throat-clearing, and the last two are references. The meat is the five pages in the middle: three pages of tables, and another two of footnotes, detailing every instance of hyperinflation that the world has ever seen.

Hyperinflation, here, has a clear quantitative definition: prices rising by at least 50% per month. (Remember that, the next time some scaremonger starts talking about how US monetary policy risks causing hyperinflation.) And after some three years’ work, Hanke and Krus have managed to come up with an exhaustive list of every hyperinflationary episode in history — 56 in all, or 57 if you include North Korea in early 2010, where the data aren’t solid enough to merit inclusion in the list.

Every entry gets its own footnote, and while there are a lot of relatively easy-to-obtain IMF publications in there, there’s also no shortage of much more obscure source material: Simeun Vilendecic’s Banking in Republika Srpska in the late XX and early XXI century, for instance, or Abram van Heyningen Hartendorp’s 1958 History of Industry and Trade of the Philippines.

The earliest hyperinflation on the list came in France, at the end of the 18th Century, when inflation hit a monthly rate of 304% in mid-August 1796. The famous Weimar hyperinflation in Germany is pegged as taking place between August 1922 and December 1923; it reached a monthly peak of 29,500% in October 1923, with prices increasing at 20.9% per day, and doubling every 3.7 days. And the longest period of hyperinflation comes in Greece, which saw hyperinflation for a whopping 55 months, from May 1941 to December 1945. There’s no particular reason, looking at this list, why Germany should have been particularly scarred by hyperinflation, to the point at which it fiercely attacks even the possibility of relatively modest inflation, where France and Greece (not to mention Hungary or China or Argentina) have been much less deeply affected.

There is, however, a very strong correlation between the length of time that a period of hyperinflation goes on, and the levels that it can reach at its height. If you look at the top six hyperinflations on the list — which include both Germany and that 55-month period in Greece — all but one lasted for longer than a year. Meanwhile, five of the bottom six hyperinflations took place in just a single month, with the sixth lasting just three months.

At their highest, the numbers start to beggar the imagination: in mid-November 2008, for instance, inflation in Zimbabwe reached a monthly rate of 79,600,000,000%. That’s 79 billion percent per month. At that rate, prices pretty much double every day. And Zimbabwe doesn’t even manage to grab the top spot: in July 1946, Hungary saw hyperinflation of 41,900,000,000,000,000%. That’s 42 quadrillion percent in one month, with prices doubling every 15 hours.

The real value of this paper is its exhaustive nature. By looking down the list you can see what isn’t there — and, strikingly, what you don’t see are any instances of central banks gone mad in otherwise-productive economies. As Cullen Roche says, hyperinflation is caused by many things, such as losing a war, or regime collapse, or a massive drop in domestic production. But one thing is clear: it’s not caused by technocrats going mad or bad.

For that matter, there are no hyperinflations at all in North America: the closest we’ve come, geographically speaking, was in Nicaragua, from 1986-91. In fact, if you put to one side the failed states of Zimbabwe and North Korea, there hasn’t been a hyperinflation anywhere in the world since February 1997, more than 15 years ago, despite the enormous number of heterodox central-bank actions in that time.

All of which is to say that hyperinflation, in and of itself, really isn’t anything to worry about. It’s pretty much impossible to predict — and if your country has hyperinflation, it almost certainly has even bigger other problems. In fact, I’d hesitate to categorize hyperinflation as a narrowly economic phenomenon at all, as opposed to simply being a symptom of much bigger failures at the geopolitical level. Those failures are exacerbated by hyperinflation, of course: there’s very much a vicious cycle in these episodes. But you only ever find hyperinflation under extreme conditions, and, with a single exception (Peru), I’m not even sure I can find any genuine democracies on this list.

Update: As many people have helpfully pointed out, Weimar can definitely be considered a genuine democracy, even if it was suffering extraordinary geopolitical burdens.

In one of those classic understated TBI headlines, Vincent Fernando today says that “Actually You Should Panic” if TIPS yields go positive. His argument: “if TIPS yields hadn’t fallen to where they are now, then we’d truly have something to worry about — Deflation.”

The problem is, Fernando’s math doesn’t add up. Expected annualized inflation, over the next five years, is equal to the yield on 5-year government bonds, minus the yield on 5-year TIPS. (We’ll ignore things like the liquidity premium for on-the-run Treasuries.) The 5-year Treasury bond is currently yielding 1.47%, so if the 5-year TIPS yield is slightly negative, that puts expected inflation at about 1.5%. On the other hand, if the 5-year TIPS yield were up at 0.5%, then that would put expected inflation at 1%. Which does not count as Deflation, and is certainly nothing to Panic about.

Of course, it is a bit more complicated than that. For one thing, we’re talking about average inflation over five years, which given that inflation rates tend to bounce around a bit, might well mean a brief amount of time in negative territory. But that, again, isn’t the kind of deflation to panic about.

Meanwhile, deflation does provide one technical reason why negative TIPS yields aren’t necessarily as weird as they look. If we do have a brief bout of deflation, then TIPS coupons will be zero — which is actually positive in real terms. TIPS investors never need to give money back to Treasury. So it’s not necessarily true that you’re getting a negative real coupon: if there’s negative consumer price inflation for any length of time over the next five years, the zero bound on coupon payments might even things out. There’s also a lower bound of 100 on principal repayments, which may or may not come into play depending on the price/yield at which you buy your bonds.

So really, negative TIPS yields can be taken as a sign that the markets are beginning to price in some brief dip into negative-inflation territory. They’re not a sign that the markets are expecting no deflation.

Jim Surowiecki has a good column on inflation this week:

Why are people afraid that inflation is about to get out of control? Because they’re always afraid that inflation is about to get out of control.

He’s right: it’s hard to find someone who’s worried about inflation right now who isn’t always worried about inflation. If you stay worried about inflation for decades, of course, eventually you’ll be able to claim justification. But I’d take you much more seriously on the subject of inflation today if you hadn’t told me all the way through the Fed rate cuts of 2007 and 2008 that each one was about to unleash monster inflation and was a Really Bad Idea. If we’d been listening to the likes of Barry Ritholtz, we’d still have Fed funds at 5% today.

Megan McArdle is unhappy with the state of green consumption:

When I look back at almost every “environmentally friendly” alternative product I’ve seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at “industry” who don’t care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version.

(Scare quotes Megan’s, natch.)

The problem, as Megan admits, is that she’s looking at the “cost-free” replacements: the bottom-of-the-line green products which can be used to replace legacy products which are the result of decades of development and economies of scale. It’s hardly surprising that these first- and second-generation products can’t compete on price.

But my feeling is not that the new products are too expensive, so much as that the old products are too cheap. That’s certainly the case with food: chicken, beef, and other corn byproducts — including the famous high-fructose corn syrup — are so underpriced that their cultivation is destroying the planet and causing mass obesity.

And more generally, the story of both Greenspan bubbles is that the Fed was happy to bring interest rates down to extremely low levels because of the massive amounts of disinflation being imported to the US by China (again, at huge environmental cost).

My hope is that the world which emerges from the present crisis will be one where goods, in general, have a price which is commensurate with their cost. I remember walking down Broadway last year, in Soho, and overhearing a woman coming out of H&M explaining to her friend that the clothes there were great: they were so cheap that you could wear them once and simply throw them away, without having to worry about how they stood up to washing or dry-cleaning. And although it was easy to conjure up lots of high moral dudgeon to direct at the woman in question, the fact is that incentives matter, and the prices at H&M were clearly incentivizing her to feel that way: as a general rule, it’s not good for the planet when a frock costs roughly the same as the cost of dry-cleaning it.

So it would be great to have some targeted inflation here: not just to help solve the housing mess, but also to bring the cost of many everyday products up to a point at which people become much more careful about using them — and much more inclined, too, to pick a green alternative.