On hyperinflation

1. Prompted by an article about the Iranian currency collapse posted at HPC, my working theory on hyperinflation is that you only get it if there are currency controls, whether that's a peg (whether upwards or downwards), restrictions on movements in or out, split or official and grey-market exchange rates, artificially high or low interest rates etc.

2. The precise transmission mechanism is a bit of a mystery to me, as it does not seem to make much difference in which direction the government interferes, it always leads to inflation. With Iran of course, it is not the Iranian government which is imposing the restrictions, it is the US government still pursuing some petty vendetta after thirty years, but the effect is the same.

3. The Market Oracle have published a handy table, and the conclusion is that "Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, the transition from a command to market-based economy", which from scanning their table seems like a fair summary.

4. The conspiracy nutters will always mumble about "fiat currencies" but these are usually the same people muttering about "printing money" and "the burden of taxation" in the same breath. Any MMTer can tell you that governments print money by spending it and un-print money by taxing it away again; ultimately, the point of taxation is to prevent inflation rather than to fund the spending side.

5. In a UK context, there is another factor, the aftershock of house price bubbles, the government desperately creates credit in order to either prop up house prices or to stoke inflation with the sole purpose of masking real house price falls (Home-Owner-Ism is not a hedge against inflation; it is the reason for inflation; it is a self-fulfilling prophecy)

6. So in which periods did the UK have the highest inflation? Chart from here
7. Yup, in the 1970s when they had to mask fifty per cent real house price falls and when we still had quite strict currency controls; then there was another bout around 1990 when we tried to peg GBP to other European currencies (i.e. basically the Deutschmark).

8. As we learn from Japan, the amount of deficit a government is running or the amount of credit it is creating, doesn't really cause inflation as long as there are no currency controls.

9. Which is why I am quite sanguine about the possibility of the UK government trying the same trick as they did in the 1970s and masking the twenty or thirty per cent real house price falls yet to come with very high inflation - they can't do it unless they re-introduce currency controls, and I don't think the banks will like that very much, so I don't think it will happen. And if it does, we are all doomed anyway. The highest inflation rate they can achieve nowadays is about five per cent inflation a year, as the chart shows, which has come down slightly since.