July 14, 2020 | Going Hyper

Chris worries a lot. These days it’s about the guys running this joint.

“My hubby and I are in our late-50s,” she tells me.  “We’ve worked hard, bought a house for half of what TNL@TB told us we could afford, went without fancy cars and vacations, so that we could make double payments to pay off the mortgage fast. And despite setbacks over the last few years, we’ve managed to set aside money for a rainy day and for a reasonable retirement.”

Okay, all good. Frugal. Industrious. Prudent. Ace savers and planners. So what’s to sweat over?

Our biggest nightmare is that we save, save, save, only to have our retirement turn from reasonable to eating dogfood, all because our government is not being as fiscally responsible as we have been. Inflation is bad enough, but with our current national debt projecting to be over a trillion this year, we worry about whether hyperinflation is a very real possibility.

Would you be kind enough to cover hyperinflation in one of your upcoming blogs? I’ve been reading about Germany in the 20’s to try to understand this topic better but I know you could help with our understanding much more than books can. Is there fair warning or ‘signs’ before Hyperinflation hits? How long does this usually take (days, weeks, or months?) Would you recommend a different investment strategy (acquiring hard assets maybe?) if you suspected that hyperinflation was coming?

Thanks very much Garth. Your knowledge has helped us immeasurably over the years and is very much appreciated!

It’s true we’ve never had debt like this before, and certainly without a war to fight. Ottawa will spend about $350 billion more this year than it collects. That will be added to the debt, which will indeed climb to over $1 trillion. That equals 50% of the economy, but when provincial red ink is added the public debt climbs to 90% of total GDP. Globally, we’re already in the top 20 of wretchedly indebted lands. And it will take years now to climb out of this hole. If ever.

Yabbut, so what?, the voters cry. A poll this week found a majority think Mr. Socks should keep the spigot open rather than focus on getting the books in better shape. We like our CERB. And the NDP is making a lot of noise over there on the left flank calling for a wealth tax to Hoover the 1%ers in order to pay for the Covid billions, plus pushing for a universal income. CERB forever.

In any case, Chris, three things seem certain: there will be years and years of more deficits ahead. The beast is out. Second, taxes will have to increase at all levels, from property levies to a new bracket for income, to user fees and maybe more HST. Every level of government has been whacked. Third, public services will shrink – from garbage collection to the size of the armed forces. Along the way interest rates will stay depressed and savers penalized. Unemployment will be elevated for several years until pre-virus levers are hit. The economy will take a long time to restore, and a 97% year/year decline in passenger traffic at the country’s biggest airport clearly indicates such. (Pearson this week punted a third of its staff.)

Does this sound like a recipe for inflation? Actually, no. We’ll see under-utilization in the economy for a while – idled workers, lost businesses, reduced output and profits, downward pressure on real estate and lower consumer spending. In fact, Chris, all of this massive government spending has been in place to prevent deflation. Maybe even a viral depression. This explains 0% rates, asset purchases by CBs and overwhelming government spending as politicians scrabble back from the precipice.

But, I hear you mutter, what about those hundreds of billions just created? Don’t they water down the currency, make dollars worth less and ignite a wage-price spiral? Won’t inflation spike housing, for example, igniting FOMO as real estate gets more expensive every month and buyers panic?

Anything’s possible and, in fact, a bit of this is happening in some areas, to some commodities. Like Toronto housing, where pent-up demand is boosting prices. That’s not because of inflation expectations or devalued cash, however, but by demand exceeding supply and money costing next to nothing. Hyperinflation can start like this, but it would have to be on a much broader, wider scale – unlikely in Canada where people are already pickled in debt. So an outbreak of hyperinflation here would have to come through excessive money printing, drastically increasing the supply of currency.

That would crash the dollar, send the price of imports surging and lead to insatiable wage demands. Hyperinflation typically happens when prices jump by about 50% a month for a period of time – which is a far cry from the Bank of Canada’s current target of 2% per year. In fact, the latest monthly report came in at -0.4% which is, yes, disinflation. And look at the loonie. It’s worth about the same as it was five years ago, despite our national debt doubling in that period of time. Mr. Market, in other words, does not see the hyper hounds unleashed.

Inflation will not eat your wealth, Chris. Deflation, in fact, is a worse threat. Far scarier. And closer.

You are right, however, to look to Parliament Hill and despair – over the PM’s mom, brother, wife and the judgement of an entire family.

Garth Turner July 14th, 2020

Posted In: The Greater Fool

Next: Why & When Will the West Crash & Burn? »