On The Possibility Of Hyperdeflation

Even given the failure of hyperinflation to pass since a variety of pop-Austrian TV finance pundits predicted it since 2008 in the wake of the various quantitative easing programs, the world at large continues to talk of the possibility of hyperinflation in the future. The value and purchasing power of money is a significant topic for the entirety of society — savers, debtors, large and small businesses, workers, welfare recipients, pensioners, etc — so it is no surprise that people fixate upon historical events in which the purchasing power of money has gone to zero. Yet this previously-known and widely talked about phenomenon may not occur in the future for most countries. Instead, a previously unknown phenomenon that I now tentatively coin hyperdeflation may be far more common.

Hyperinflation is an interesting phenomenon. As I have noted in the past, it seems to be predominantly associated with collapses in agriculture, infrastructure and transport, the loss of a war or natural disasters. Faced with dire economic breakdown and spiralling prices and wages (as plentiful paper money chases after increasingly scarce and limited goods) monetary policymakers are forced to print in an attempt to keep a broken economy going. In a functional economy like present day Japan, Britain or America with no mass breakdown of institutions, transport or infrastructure (and thus with with freely available food, energy and resources) printing (or digitally multiplying) money does not lead to huge, soaring inflation. But in an economy already disrupted — like the many countries on this list that experienced hyperinflation — the inflationary impact of new base money just continues to spiral, and all the extra paper dumped into the system is simply abandoned and rejected by the public as its purchasing power gravitates toward zero.

And in the modern world, some countries and places may have become more susceptible to the kinds of economic breakdowns that could lead to hyperinflation given a bad-enough shock. In an increasingly interconnective and trade-dependent world, natural disasters or wars can shut off the supply of important products or components that countries or regions do not and cannot manufacture. That makes this a particularly fragile phase of history, even if it does not seem so given the huge and widespread affluence not just in the West, but also increasingly in the developing world.

Yet beyond this phase of history, stretching out into the long run, the opposite may become true. Society is shaped by its technological capacities — this has been true since the days of the spear, the wheel, the bow, etc — and our technological evolution continues at ever rapider rates. The internet has already provided a channel for mass cultural interconnectivity, and the effective decentralisation of media. I have written at length on the possibility of superabundant decentralised energy from falling solar and alternative energy costs, combined with the possibility of mass decentralised molecular manufacturing. Simply, if every house has an advanced 3-D printer that can transform soil and waste into food, consumer electronics, or tools (etc), and a superabundant energy source from high-efficiency solar panels (or artificial fossil fuels, or even micro-nuclear reactors) then the era of material scarcity is effectively over, and humanity can concentrate its energies on other matters (cultural, religious, philosophical, space colonisation, etc). Now, we are still a while away from a single house having such capacities, but the implications of the beginning of that era will be profound.

My supposition is that the era of superabundance will be characterised by very strong deflation as the supply of goods and energy becomes increasingly superabundant. This trend has already begun in the West, where inflation and interest rates have — in the context of cheap Eastern labour, computerisation and automation — been falling for the last 20 years. Even strong quantitative easing by central banks has not reignited strong inflation. My guess is that unless we experience some huge shock that dramatically shakes the foundations of society — like a megatsunami, or a nuclear war, or a mass pandemic that wipes out half the population — it will be hard for strong inflation to ever return no matter how much money central banks print. Central bankers may be able to keep inflation close to zero with strong activist monetary policy, but even that may be challenging especially as the age of superabundance draws onward.

Of course, in a world of material superabundance, trade and business will not end. While everyone may have a molecular factory in their house that can build anything from a huge library of open-sourced 3-D designs downloadable from the internet, people will still have to design things and create things. Although at some stage the machines may become sentient and creative, this appears to be at least a very, very long way away. So all the 3-D printers, robots and unlimited energy in the world won’t for the foreseeable future invent things, or write a Hamlet or a Breaking Bad, or a Dark Side of the Moon or an Emperor Concerto, leaving humans an important niche as designers, empathisers and imagineers. While with superabundant energy and goods, people will have all the resources necessary to devote themselves to such pursuits, people as they have done throughout history will still choose to co-ordinate and collaborate, so they will still need some currency. Whether this will take the form of state fiat money, or private currencies like Bitcoins, Facebook and Youtube likes, or Whuffies, or a mixture of the above remains to be seen.

Another possibility, of course, is that there will still be scarcities even in the era of superabundance. While every house may be able to manufacture an unlimited quantity of food, household goods and gadgets, some highly-desired technologies and goods like interstellar spacecraft or particle accelerators or exotic matter may remain far beyond the reach of a typical household or community either on technological grounds or on the grounds that they are contraband (it is quite easy to imagine that manufacturing of certain goods — weaponry in particular — may be made illegal by states, who may create increasingly sophisticated and Orwellian surveillance structures to prevent the distribution of illegal materials). These post-superabundance scarcities may form the basis of new widespread media of exchange and units of account, especially if state fiat money hyperdeflates its way to irrelevance.

(And yes — in an age of superabundant energy, gold will in all likelihood lose its scarcity, as with enough energy it is possible to transmute lead into gold in a particle accelerator. This means it is quite possible that gold’s all-time high of $1917 in September 2011 may be the highest dollar-denominated price gold ever trades at).