By Cullen Roche
Twitter lit up over the weekend when Jack Dorsey said hyperinflation is coming.
Dorsey is a vocal advocate of bitcoin /zigman2/quotes/31322028/realtime BTCUSD -2.65% and also the CEO of two public companies, fintech company Square /zigman2/quotes/205989440/composite SQ +2.78% and social-media platform Twitter /zigman2/quotes/203180645/composite TWTR +2.83% .
This is an interesting prediction for a CEO for several reasons:
1. If he really believed what he said, then he should, as a fiduciary to his shareholders, be advocating for far less U.S. dollar exposure within his companies. Michael Saylor, CEO of MicroStrategy /zigman2/quotes/202561856/composite MSTR +1.33% , has developed the playbook for this. But Square and Twitter currently have over $10 billion in dollar reserves, which would evaporate in the case of hyperinflation. If he truly believed what he said, then he should either be advocating for revenue payments in inflation-protected assets (such as bitcoin) or be immediately converting large amounts of dollar reserves into some sort of inflation-protected asset. Perhaps this is in process. Square has some bitcoin hedging, but both firms are very exposed to dollar incineration (per Dorsey’s prediction).
2. If I worked for a company whose CEO was calling for hyperinflation, I would ask for an enormous wage increase. Hyperinflation would cause Twitter and Square employees to lose massive amounts of purchasing power. If I were them and I knew the CEO expected 50%-plus inflation per year, I would expect a big raise to help offset this coming crisis and allow myself to better allocate dollars to other assets.
Hyperinflation is generally agreed to be a continuous 50%-plus increase in the rate of inflation. (See footnote No. 1, below.) It is essentially a complete destruction of a national currency. It isn’t a small problem. It’s the absolute worst kind of financial crisis an economy can have. If you think the 2008 financial crisis was bad, that was a cake walk compared to what hyperinflation does. A financial panic ruins the economy for a decade, but hyperinflation ruins an economy for an entire generation.
If Dorsey put his money where his mouth is, he’d start gobbling up huge amounts of bitcoin or other non-dollar assets on Twitter and Square’s balance sheets. And he’d start paying his employees in bitcoin or give them huge wage increases.
Alternatively, he should realize his words carry a tremendous amount of weight and revise his statement. “Inflation,” “some inflation,” “lots of inflation,” “my margarita got way more expensive” … these things are not hyper inflation. And such a heavy word, if truly believed, should correspond with serious action. Aside from these inconsistencies in words and actions, I think there are significant economic problems with such an extreme prediction.
The economics of Dorsey’s prediction
This discussion is groundhog day for me. After the financial crisis, there were hyperinflation predictions because many believed that the Federal Reserve’s balance sheet expansion would lead to a multiplier effect of reserves, resulting in a huge boom in the money supply.
That didn’t happen because, as I explained at the time , banks don’t even lend reserves to non-banks in the first place. Quantitative easing (QE), the stimulus program, is an asset swap that has little to no impact on the quantity of net financial assets in the economy. There was no way the Fed’s balance sheet expansion could cause huge inflation. People tend to focus on the Fed’s monetary policy actions, but ignore the fact that it’s the Treasury’s fiscal policy actions that matter most.
The more interesting facet of this period was my research on historical cases of hyperinflation and their actual causes. The primary finding from my 2011 paper, “Hyperinflation – It’s More Than a Monetary Phenomenon,” was that hyperinflation tends to occur around hugely disruptive geopolitical events:
Losing a war that results in money printing to fund the effort.
Large foreign-denominated debts that require domestic money printing.
Regime changes generally coinciding with civil war or social upheaval.
The key point is that money printing isn’t what causes hyperinflation. Money printing occurs as a result of one of these socially or politically traumatic events that essentially result in a collapse of the government or regime. This is not remotely close to what’s occurring in the U.S. But while we don’t have the ingredients for hyperinflation, we do have the ingredients for moderately high inflation because there’s no doubt that oversized fiscal policy can cause high inflation.
As it pertains to inflation and the financial crisis more specifically, the lesson following 10-plus years of QE with low inflation is that fiscal policy is the big bazooka. That’s where the real “money printing” occurs, if we want to call it that.
And that’s why I have been much more concerned about inflation coming out of the pandemic. Last summer I said the risk wasn’t hyperinflation, but more like 3%-4% core inflation (which is quite high, given the Fed’s 2% target). We’re at 3.6% as of the most recent reading, so pretty much bang-on. Of course, headline readings are higher, but the Fed likes to focus on core, in addition to, headline inflation. I’ve also been vocal about the messiness of the “transitory” terminology and how none of this was likely to be transitory in the way the general public perceives it.
So, how worrisome is the inflation outlook?