Hyperinflation: Will the U.S become Lebanon?
Topics Discussed
Introduction
Lebanon currency crisis
Similarities and distinctions between the U.S and Lebanon
Additional signs of possible future high inflation
My overall opinion
Introduction
Ever since the start of the pandemic, I have seen a lot of case scenarios being thought up by finance professionals claiming that the United States recent Covid-19 policy’s are either going to end up being deflationary or inflationary. Although, I must say the most prolific argument is that the United States is heading towards secular inflation with economist and legendary investors such as Michael Burry, Ray Dalio and Peter Schiff all calling for higher yoy consumer prices. According to the U.S Bureau of Labour Statistics, inflation has risen approximately 5.4% over the trailing 12 months having portfolio managers concerned on whether or not these higher than average price increases are transitional.
Is inflation transitory? Thats the trillion dollar question and I will try to provide as good of an analysis as possible to help you figure out where you may stand on that. Firstly, I will be conducting an analysis on Lebanon’s recent currency crises and see if we can draw any distinctions between the U.S and Lebanon. Next, we will take a dive into some data in which could signal abnormal inflation levels. Lastly, I will provide you with my opinion on the matter.
Lebanon’s Currency Crisis: Just What Happened?
In August of 2019, Lebanon experienced a free fall in its Lebanese Pound causing consumer prices to skyrocket for the nation.
What happened to the sudden drop in the value of the Lebanese Pound? To begin with, the nation has been notorious for being massive importers. Having an extreme imbalance of trade is always risky whether surplus or deficit though the outcome may differ, but in the case of high current account deficits, the result is usually downward pressure on a nations currency. This, combined with large national debt causes currencies to depreciate over time however, Lebanon, much like the U.S had attractive financial markets and institutions which attracted large sums of foreign investment from financial elites within the Middle East. Due to their capital account surplus, Lebanon was able to maintain a stable currency and get away with having large loads of government debt. Unfortunately for Lebanon, the country next door Syria was seeing their political problems beginning to exacerbate, making foreign investors nervous about depositing money into Lebanese banks. The capital outflow then took support out of the Lebanese Pound and the currency fell and inflation rose.
How does the United States Compare to Lebanon?
Although the United States is a far larger economy and much more influential globally, there are qualities of the U.S economy in which the Lebanese economy shares. Firstly, the U.S has a massive trade deficit.
Secondly, the United States is a massive debtor nation with around a 101% public debt to GDP at the time of this writing. Lastly, the United States has a strong and attractive financial system in which the capital inflows allows them to attain such large deficits. Now although that when looking at certain aspects the economies appear to be identical, there is one huge difference between the two nations. The United State’s status as a politically stable, economic super power. It doesn’t take an economist or an MBA to distinguish the difference in safety and stability between the Lebanese and American financial systems. In addition, the U.S remains the worlds reserve currency which highlights the adequate faith in which the world holds in the United States financial system. For this simple reason alone, saying the U.S will become Lebanon and see a massive outflow of capital is an extremely unlikely result.
Could The U.S still see High Inflation?
Now that we determined that the United States is not Lebanon, we must look at additional data that could suggest that inflation is on the horizon. The first factor is inflation being trapped in asset prices such as Real Estate and Equities. Economist have said that higher real estate prices could in fact turn into higher consumer prices due to commercial rents rising, causing businesses to pass those rising expenses over to their customers. This could in fact be true, however if anyone remembers the Japanese bubble in 1990 and the U.S bubble in 1929, you see that inflated asset prices are generally followed by periods of secular deflation. Now I should mention that the popping of both those bubbles was also due to a rate hike in which I do not believe the Federal Reserve will intend on doing anytime soon. If America decides to keep infinite QE programs and rates low as long as possible, the possibility of history not repeating itself may become likely. The second factor of possible high or hyperinflation is the quantity theory of money.
The Quantity Theory of Money is a calculation to help determine price increases and is an improved form of monetarism because QTM takes into account that not all newly created money is automatically circulated as new money may be saved or invested. Therefor, artificial money supply increases do not directly impact inflation. Just because U.S M2 monetary aggregates increased 25% in 2020 alone, does not mean that the U.S will see a 25% inflation rate because not all newly created money was spent and has been circulated. Now the United States has done further drastic measures than just increasing the money supply, the U.S has directly debited citizens accounts with newly created money in the form of stimulus. If people go out and begin to spend more with their free unearned money, you could see inflation possibly increase. I could argue that with all the extended unemployment benefits on top of the stimulus cheques, there is an increased risk of high inflation, especially if production remains distraught. The last factor that could set off inflation is supply chain disruptions from the pandemic, if these supply chain disruptions continue or even get worse, the transition period of inflation could become more prolonged.
My Opinion on Future Inflation
To conclude this article, I will provide you with my opinion on what the future holds in store in terms of the U.S inflation rate. I believe between prolonged supply chain shortages, large scale fiscal stimulus and extended unemployment benefits, we could possibly see higher inflation than the Fed’s desired 1-3% for the 2020s. I know the Federal Open Market Committee has stated that they would counter inflation if it were to rise however, due to the nations large debt, prolonged low rates and political desire to protect portfolio and home equity, I find the Federal Reserve with limited options if inflation were to rise. Now, if in many years the politcal divide within the U.S becomes more apparent and the rise of a digital Yuan, Gold or a Bitcoin were to occur, America could become the next Lebanon. That remains wild speculation at this point in time.