Can Hyperinflation Be a Real Threat to the U.S.?

While inflation seems to be on everyone’s mind these days, misconceptions abound. Indeed, few concepts in economics are as misunderstood as inflation. This month I take a look at some common questions about inflation, and a few that I wish more people were asking.

“Until we return to a stable, rule-bound international monetary system, inflation will continue to be source of anxiety in economies and asset markets around the world.”

Is hyperinflation coming to the U.S.?

No. Hyperinflation arises only under the most extreme conditions, such as war, political mismanagement, or the transition from a command economy to a market-based economy. If you compare the U.S. to countries that have experienced hyperinflation — think Iran, North Korea, Zimbabwe, and the former Yugoslavia, for example — the U.S. doesn’t even come close. Hyperinflation begins when a country experiences an inflation rate of greater than 50 percent per month — which comes out to about 13,000 percent per year. Although it experienced elevated inflation around the time of the Revolution and the Civil War, the United States has never passed this magic mark. At present, the U.S. inflation rate, measured by the consumer price index, is less than 2 percent per year. So, to say that the U.S. is on its way to hyperinflation is just nonsense.

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But what about Quantitative Easing? Won’t that cause high inflation?

No, at least not under the current QE program. What many people fail to understand is that the money created by the Fed, through programs like Quantitative Easing, is what’s known as “state money” (monetary base). In the U.S., this makes up only 15 percent of the money supply, broadly measured. The remainder is made up of “bank money” — the all-important portion of the money supply produced by banks through deposit creation…