It can’t happen here….can it?

The dreaded “H” word….hyper inflation…instils fear into the very soul of Chancellors of the Exchequer and economists everywhere…and with good cause. During periods of hyper inflation, savings, fixed incomes and businesses get decimated. Right now, we have a great model for hyper inflation…Zimbabwe.

In Zimbabwe, the cost of goods in local currency terms has skyrocketed. A can of coca cola costs $100bn Zimbabwean dollars. You read that right….one hundred billion dollars. (move pinkie to corner of mouth a la Austin Powers). How can this cataclysmic situation come to pass?

The answer is simple, and it revolves around the money supply. When a country has to print money to pay off the interest on its debt, the currency slowly gets devalued. Slowly initially…until the devaluation and the money printing reach such epic proportions that bank notes are worth something one day and close to nothing the next day. The most famous example of this is in the Weimar republic where the famous story goes of a woman who was taking a wheel barrow full of currency to the bakers to buy a loaf of bread. Unfortunately, she got mugged and the smart thieves tipped out the currency and ran off with the wheelbarrow!

So in the UK, once we spend all our savings on bailing out banks, we have to turn to raising money from debt….but that debt has to be serviced and interest payments have to be made at regular intervals…so more money is printed to achieve this. At the point where the population can’t be taxed anymore and the debt service payments reach a level that further currency needs to be printed, the slow, then fast devaluation of the currency follows and hyper inflation is just around the corner. Considering how much money Alastair Darling is considering spending in a Herculean attempt to reflate the British economy single handed, hyper inflation may be here sooner than any of us realise.

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Tags: Alastair Darling, Chancellors, Hyper Inflation, UK Banks, Zimbabwe