Exclusive: QE Won’t Trigger Hyperinflation, says World’s Hyperinflation Expert

Sead Fadilpašić
Last updated: | 7 min read

Hyperinflation doesn’t happen as easily as one may think. “If there hadn’t been quantitative easing in 2008, instead of a great recession, we would have had a great depression.” Private currency boards would make central banks more disciplined.

The central bank of Zimbabwe issued a 100,000,000,000,000 note during the hyperinflation in 2009. It barely paid for a loaf of bread. Source: Adobe/swisshippo

There has been a lot of discussion recently on the effects of the COVID-19 pandemic on the global economy, on the measures taken by the governments to mitigate those effects, the possible hyperinflation certain measures could lead to – and how would that affect bitcoin (BTC) adoption.

However, at least one narrative – hyperinflation – is not likely to materialize, according to the man who helped multiple countries to deal with hyperinflation.

Steve H. Hanke, a Professor of Applied Economics at the Johns Hopkins University and the prominent expert on hyperinflation, told Cryptonews.com that hyperinflation is very unlikely – it’s basically “a false notion.” It’s actually a “fairly unusual” event and doesn’t happen as easily as one may think. Furthermore, he said that the quantitative easing (QE) announced by the U.S. Federal Reserve (Fed) and the trillions of USD dollars planned for “printing” will not lead to hyperinflation.

The professor argued that most people see quantitative easing at a central bank, as well as “the money supply from the central bank going up and the balance sheet of the central bank expanding tremendously,” and automatically conclude that “hyperinflation is right around the corner; the central bank is unleashed.” They know that “the central bank is exploding the money supply, but they don’t realize that that is only a small part of the total money supply.”

Steve H. Hanke. Source: Cato.org

The total money supply is actually made up of two components: state money that’s issued by the central bank, and bank money that’s created by commercial banks. It’s the bank money in the United States and in most of Europe that make about 90% of the total supply.

The professor used the 2008 financial crisis as an example. Upon seeing quantitative easing, he said, people concluded that there’d be hyperinflation, but it never happened. At the time, many new bank regulations came in, strangling the commercial bank, and bank money were declining. In order to mitigate the problems associated with that decline in bank money, the central banking system in the U.S., the Fed, came in with quantitative easing. With the quantitative easing adding to the money supply and bank money subtracting from the money supply, the total money supply was growing at a very slow rate for a decade, despite the four phases of quantitative easing. In fact, the money supply in the US only started growing at a reasonable level during the last 12 months, explained Hanke.

“And if there hadn’t been quantitative easing in 2008, instead of a great recession, we would have had a great depression, the economy would have collapsed completely,” said Hanke.

In a recent article (the Wall Stree Journal, paywalled) discussing the ways in which the Fed can ease the pandemic-triggered crisis, Hanke and economist John Greenwood are advocating that central banks should engage in a massive lender of last resort activities. “So that anyone who wants credit from the Central Bank can get credit as long as in exchange those people who are borrowing give paper to the central bank that has good collateral behind it,” Hanke said. And that’s what the central bank in the United States has done.

Europe was a little late, said the Professor. The European Central Bank (ECB) started doing “the right thing about a week after the Fed” by engaging in “roughly speaking, quantitative easing or a very large expansion of the base money component of the total money supply, and the UK is doing the same thing.”

Events leading to hyperinflation

Hanke went on to explain another reason while hyperinflation is unlikely. He said that the term ‘hyperinflation’ is “misused and oppressed horribly.” Its definition is that the monthly inflation has to exceed 50% to qualify as a hyperinflation. The world has seen only about sixty hyperinflations so far. Also, according to him, hyperinflation in Venezuela has technically ended – the annual inflation rate in the country was 2,591% on March 27.

The four largest hyperinflations, as explained by Hanke and Nicholas Krus in the World Hyperinfations article published in the Routledge Handbook of Major Events in Economic History, were:

  1. Hungary in July 1944 (4.19 × 10 to the power of 16% a month)
  2. Zimbabwe in November 2008 (7.96 x 10 to the power of 10% a month)
  3. Yugoslavia in January 1994 (313 million % a month)
  4. Entity of Bosnia and Herzegovina Republika Srpska in January 1994 (297 million % a month).

Hanke has been measuring hyperinflation across the world daily for decades, stopping the event in a number of countries – for example in Yugoslavia, by replacing the Yugoslav Dinar with the Deutsche Mark. He has concluded that hyperinflation typically happens after major events, such as big wars, or falls of regimes. In Yugoslavia, there was a collapse of communism, as well as wars in the first half of the 1990s. In the midst of these massive events, the government was spending a lot of money but had no means of taxation – they weren’t collecting any taxes, and they didn’t have any bond markets. Instead, they went to the central bank to extended their credit and finance a huge government deficit – about 97% of their expenditures were being financed by the credit from the central bank in Belgrade.

“And that means that central bank can in effect just turn on the printing presses, and they did. The printing press was going so fast they couldn’t keep up and re-denominate the dinar fast enough. They finally gave up. That’s how such a massive hyperinflation happened,” Hanke told Cryptonews.com.

However, if monthly inflation hits 45% and, according to the definition, is not hyperinflation, it would still hurt people and businesses.

“On the one hand, if the central banks continue to inject liquidity at their current unprecedented high rate and do not eventually remove it, inflation will definitely pick up. On the other hand, if the injections are not sustained or eventually removed, inflation probably won’t be much of a threat,” the Professor said.

Private currency boards

Meanwhile, Hanke doesn’t agree with crypto supporters that bitcoin is a currency and says that it is “an interesting speculative asset.”

“It doesn’t have the characteristics of a currency because it’s not a stable unit of account – to be a currency you have to have a stable unit of account. It’s like a measuring rod, and you can’t have a measuring rod with measurements fluctuating all over the place. You’d never be able to do anything,” he explained his view.

On the other hand, according to him, gold is a good hedge given the golden constant – over a long period of time, the purchasing power of an ounce of gold remains about the same, and this makes it a currency, and an international one at that.

Hanke is also a big advocate of private currency boards: the money would be issued from a private currency board and traded at a fixed exchange rate whatever the anchor is. For example, there could be a gold-based currency board where the anchor is gold and that currency is a clone of gold, or it could be an anchor of the USD, trading at a fixed exchange rate with the USD, and the currency would be a clone of the USD, etc.

Some aspects of this are similar to what Facebook is trying to do with Libra, except that Libra wasn’t thought out well, had no experts who understood currency boards, was poorly advised on the nuances of the matter, and as central banks saw it as a competitor, regulators came down hard on it, Hanke argued.

He has been advocating that countries, including Iran and Turkey, adopt a gold-backed currency board, whereby, for example in Turkey, the Turkish Lira would be fixed at a fixed exchange rate with gold and be freely convertible into gold without any restrictions, while the Lira would become a clone of gold, Hanke said.

According to him, a gold-backed, private currency board would be similar to a “gold standard,” a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. It was widely used in the 19th century and early part of the 20th century.

Hanke explained that even if you had a private currency board, QE could be possible because it would be engaged in by government central banks.

“That said, government central banks would probably be much more disciplined if there were a number of private currencies competing with currencies issued by government-run central banks,” he concluded.

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