What’s Worse: Hyperinflation or Deep Recession?
I thought this was a poignant observation by Fareed Zakaria in his book, The Post-American World:
“Hyperinflation is the worst economic malady that can befall a nation. It wipes out the value of money, savings, assets, and thus work. It is worse even than a deep recession. Hyperinflation robs you of what you have now (savings) whereas a recession robs you of what you might have had (higher standards of living if the economy had grown). That’s why hyperinflation has so often toppled governments and produced revolution. It was not the Great Depression that brought the Nazis to power in Germany but rather hyperinflation, which destroyed the middle class by making its savings worthless.”
Thinking About Thinking 
there have been many bouts of hyperinflation in recent history and some countries have recovered pretty quickly (i’m thinking argentina and brazil). but memories of the great depression have left a more indelible mark on our collective psyche.
but that said, i think hyperinflation seem worse because it’s seen as a man made phenomenon, whereas the business cycle is more out of our control.
but enough rambling– i think the best way to get a definitive answer to your question is to pick the economic indicators (eg GDP) you value and see how hyperinflation and deep recessions impact them.
The answer to the “what’s worse?” question is: inflationary depression. Both camps in the current debate are wrong or, more accurately, incomplete in their analysis. Both the inflation- and deflationistas have spend insufficient time pondering the more likely scenario of inflationary depression: an economy that continues to suffer the stagnating effects of the collapse of a credit bubble (which are deflationary) while simutaneously facing rapid decline of currency value as measured against commodities, resulting in price inflation as measured in dollat terms. Why has this not happened yet? Even the amount of money created by the Fed cannot fill the gap created by the collapse of the overall supply of money AND credit that has occurred since 2007. The resulting drop-off in production activity and business demand has kept commodity prices low- for now.
[…] What's Worse? Hyperinflation or Deep Recession? […]
“Inflationary depression” is an historical oxymoron. During the Great Depression the U.S. monetary system was still on the gold standard. Thus, rather than inflation, the U.S. experienced deflation. The value of the dollar skyrocketed. Too few dollars chasing too many goods.
The current fiat currency is the exact opposite. Too many dollars chasing too few goods. Couple that with a total lack of domestic manufacturing and you have a formula for hyperinflation. All the money for goods go over seas, all the money for services stays at home. But, nobody wants to spend money on services.
I agree that China pegging their Yuan to the dollar is a good thing. Clinton, Bush and Obama have all complained about this, but the alternative of a market-adjusted Yuan would lead to a 3+ point inflation jump overnight. The Chinese keep the value of the Yuan low to stimulate exports to the U.S. It helps them and it helps us.
Personally, I would much prefer a deep recession (which is what we are experiencing now) to hyperinflation. As long as the Fed keeps the prime at zero we should be able to get out of this. If interest rates go up, like they did under Bush thanks to the idiot Bernake, then we are in for a major monetary crisis.
[…] to make a depression more favorable. Journalist Fareed Zakaria put it very well when he wrote: “Hyperinflation is the worst economic malady that can befall a nation. It…robs you of what you… I would go one point further in that hyperinflation not only takes what you have but has a strong […]