With the phenomenal rise of bitcoin this year, I woke up with hyperdeflation in mind.
Yes, these are the sordid thoughts that pass through your editor’s head first thing in the morning.
What, for example, if you’d borrowed in bitcoin rather than dollars for your house? So instead of a million-dollar mortgage…you borrowed 1,002 bitcoins on 1 January.
Assuming you didn’t have to make any repayments during the first year, you’d still owe 1,002 bitcoins today. Only they’d be worth $12.42 million in fiat money. Meanwhile the value of your house, assuming you bought in the right Melbourne suburb, has only gone up 10%…to say $1,100,000.
That’s why you’re always warned about the perils of hyperdeflation. People will stop spending if their currency is shooting up in value…or so the story goes.
Hyperdeflation, however, is exceedingly rare — if not non-existent — in the world of government-backed fiat currencies.
Rare enough that my spellcheck tells me it should be two words. Though the same program assures me that hyperinflation is fine as one word.
Google had a similar issue. ‘Showing results for hyperinflation’, it told me helpfully.
Unable to resist, I clicked on the ‘The Worst Hyperinflations in History’, courtesy of Global Financial Data.
The real motivation for inflation
Do you know which nation suffered the worst hyperinflation in history?
If you said Zimbabwe, you’re close (full disclosure, that was my guess as well).
Under then prime minister Robert Mugabe — who got the boot last month — Zimbabwe saw mind bending inflation, in the neighbourhood of 79 billion percent annually. In 2008 prices were doubling every day.
But even so, Zimbabwe only comes in at number two.
Hyperinflation in Germany during the Weimar Republic is perhaps the best known example. It began slowly after The First World War. But by 1923 inflation had gotten to the point where the government was printing 100 trillion mark notes. And even these were quickly useless.
Germany, though, comes in a lowly number four on the list.
The prize for runaway inflation goes to…drumroll please…Hungary in 1946. At the peak of the inflationary run, prices were rising at the rate of 150,000% every day. Little wonder the people were susceptible to the allure of communism in 1949.
These figures put Australia’s post-Second World War annual rate of around 25% in perspective, as you can see below.
Source: Trading Economics / ABS
You can also see that inflation has been slowly trending lower since 1976.
It should be a cause for celebration that inflation right now stands at 1.9%. Though the government would have you believe that’s too low.
The Reserve Bank of Australia (RBA) has an official target of 2–3%. You’ve probably heard this is the best level to encourage business investment and consumer spending.
People are plenty happy to invest and consume if the dollar in their pocket today would be worth the same next year…instead of less.
The real motivation for wanting to devalue your money is all about debt. The federal government has over half a trillion dollars of it, and they’ve picked their inflation target for a reason.
That’s because 3% inflation doesn’t seem terribly alarming on the surface. Your dollar today is still worth 97 cents next year.
However, compound that over 24 years, and your dollar is now only worth 50 cents.
The government’s debt, meanwhile, has also halved…all without them having to do a thing. Other than stoke inflation.
Of course, as you can see in the graph above, stoking inflation is proving ever more difficult for the RBA. And, indeed, for central banks across the developed world.
As taxpayers, I reckon we should at least be thankful the government debt isn’t owed in bitcoin. Bitcoin is up 1,596% in 2017. A deflation rate that would have seen the federal debt level blow out to over $6.2 trillion in fiat money.