The Pathology of Hyperinflation: A Dollar Disease in the Making?

In The Pathology of Hyperinflation: A Dollar Disease in the Making, we explore if hyperinflation is indeed occurring, and if that result is desirable for bitcoin’s future growth.

Currencies, like people, get sick. Even die. A person can contract a common cold and come out stronger for it, while others can suffer a chronic ailment. So too can a currency experience healthy forms of inflation, but also experience debilitating and economy-ending hyperinflation. 

A common theme covered by today’s talking heads is the possibility of hyperinflation of the US dollar and the inevitable collapse of our society as we know it. Dramatic? Yes, very. But in order to diagnose if hyperinflation is, in fact, what is occurring, we must first know the symptoms to look out for. Let us play doctor on the US dollar, and pour one out for all the currencies that have passed before us. We’ll create a symptoms chart, and see if the dollar checks off the usual suspects of hyperinflation when it is stacked against its fallen brethren. We’ll also look at Bitcoin and how it might stack up against the dollar in a hyperinflation crisis, and whether or not Bitcoin can establish itself as a new kind of inflation-resistant asset — “digital gold.”

1923, “The King of Inflation,” a man clad in worthless coins.

IMAGE: UNIVERSAL HISTORY ARCHIVE/UIG VIA GETTY IMAGES

Symptom #1: Runaway Food Prices

Food. Everybody needs it. When there isn’t enough, or when what is available becomes too expensive, the sickness begins. For one, we expect that staples will be cheap and affordable. When you walk into your local grocery store, the price of milk or eggs might fluctuate a few cents from week to week, but you probably don’t pay it any mind. But if you buy a half-dozen eggs for $1 today, and a month later the cashier says, “that’ll be $335,” you would be very concerned about the value of your dollars, or just mad and ready to steal eggs for a living. That price increase sounds crazy, but that’s exactly what happened in Germany’s Weimar Republic. In 1914, the price of a loaf of bread was $0.14. By the start of 1923 it had increased to $700. Just before the German mark collapsed entirely, that same loaf cost over $200 billion marks.

1914-1923,  the dramatic price appreciation of German bread.

The astronomical costs of food are a defining feature of hyperinflation, and a common feature in the inflated currencies that follow:

  • Due to runaway inflation, the Venezuelan government directly controls both the monthly minimum wage and price of food. In response to food shortages, they set price controls on 26 food necessities such as eggs and sausages. Because of inflation, the price of those items cost more than the monthly minimum wage ($1 USD per month!).
  • On October 7th, 2019, the state-run Grain Millers Association of Zimbabwe raised wheat prices from ZW$1,600 to ZW$2,200 per ton, causing the price of bread to increase 39% overnight, from ZW$6.80 to ZW$9.45.
  • Since the beginning of 2020, Lebanon’s inflation ballooned from 50% to a peak of 550%, becoming the first country in the Middle East to experience hyperinflation. Since December of 2019: food and non-alcoholic beverages rose 402.3%; alcoholic beverages and tobacco rose 392.5%; clothing and footwear increased 559.8%; restaurants and hotels rose 609%; and furnishings, household equipment, and routine maintenance rose 655.1%.

United States Food Prices

Does the United States tick off this symptom of hyperinflation sickness? Are food prices outpacing our earnings? Common sense says yes — and you might reinforce that perception every time you find yourself regaled with tales of the “good old days” by someone who grew up in the 1950s enjoying 25-cent gas and $2 dinners.


But let’s take a look at a couple of charts below.

Source: in2013dollars.com

Well, that doesn’t look promising.  For the most part, year-to-year price inflation of milk since 1997 is only increasing, and while the year-to-year changes individually may not look that scary, remember that just like stock returns, gains in inflation compound. Milk was 50.29% higher in 2021 than 1997 ($2.51 difference), experiencing an average of 1.71% inflation per year. The inflation rate for the US dollar during this period was 2.07%. This means the inflation of milk couldn’t outpace the inflation of the dollar, making it more expensive to buy milk now than it was in 1997, albeit only slightly. 

Granted, milk costing $2.51 more after 20 years isn’t going to cause hyperinflation. But what about all the food? And what about the “good old days?” Unfortunately, it looks even worse.

Source: in2013dollars.com

Overall food inflation is 2,632.52% higher today than it was in 1913. To put that in perspective, if milk was worth $5 a jug in 1913 and you bought one jug, it would cost you $136.60 in today’s dollars. That’s pretty bad, but keep in mind that hyperinflation is officially defined as 50% increases in goods and services each month.

While we’re not at the point where year-to-year food inflation is causing the same level of economic destruction as the countries we covered earlier, economists are worried that inflation is disproportionately affecting lower-income members of society. For the sake of our symptom tracker, the US is not experiencing hyperinflation in food prices… yet.

United States symptom tracker: Runaway food prices ❌
                                                      

Symptom #2: Wages Do Not Keep Up With Inflation

Minimum monthly wage in selected Latin American countries in 2021, chart by Statista.com

If a jug of milk cost $5 today and $10 next month, but your wages doubled to compensate, you wouldn’t notice the difference. Well, you might have sticker shock, but you would understand that your spending power is constant. But what happens when wages can’t keep up? 

Take a look at the graph above. Out of the selected Latin American countries, Venezuela has the lowest minimum monthly wage at $1 per month. As we mentioned previously, the cost of eggs and sausages exceeds a monthly wage, even as the government tries to price fix both food and wages. How did they get to this unmanageable state? Insert hyperinflation.

A brief history of Venezuela. After his election, President Chávez used the oil boom of the 2000s to borrow heavily and vastly increased government spending. By the time Maduro was elected, the global price of oil had fallen and the demand for Venezualen oil, a pillar of the economy, plummeted. Maduro’s solution? Print more money. While the intention was to provide a short-term boost to the economy, inflation skyrocketed under Maduro, and the Venezualen bolívar lost 95% of its value in 2018 and 99% of its value by 2020.

During this period, Maduro tried to artificially set the monthly minimum wage higher and higher to compensate for the rampant inflation.

2012-2020, the impact of wage increases measured in USD

Looking at the graph above, we can see how Maduro’s efforts have failed. Despite increasing wages in bolívares every year, real wages cratered and Venezuela continues to rank the lowest in wages amongst Latin American countries. Below are some countries with the same maladies:

  • The Turkish lira continues to spiral to new lows against the US dollar. In an effort to combat inflation, the government announced it will raise the minimum wage by 16% to 2,828 lira ($376.71), which they calculated to outpace the 2021 inflation forecast of 9.4% by seven points. Despite this, experts say hyperinflation is expected to outpace this latest wage increase.
  • In WW2, Hungary had managed to escape most of the ravages of war up until 1944, when it became a battleground between Russia and Germany. The resulting chaos destroyed 90% of Hungary’s industry. Without a tax base to conjure government funds, the government decided to print money. Before the war, 1 US dollar was worth 5 pengö. By April of 1946, 1 US dollar was worth 460 trillion trillion pengö. Yes, that’s two trillions. During this period, wages fell 80%.

United States Wages

How does the United States stack up against this symptom of hyperinflation? 

According to recent data, while net productivity in the US has increased to over $20/hr, real minimum wages adjusted for inflation have decreased over time, peaking at “real-value” $10.59/hr in 1968. Since then, real wages have slowly drifted downward over the years to meet the nominal minimum wage of $7.25/hr. Pictured above is a projection of a potential $15/hr federal minimum wage, which would actually only be worth $13.79 in 2021 dollars.

While this data only examines the absolute minimum wage, perhaps a stronger indicator of social disruption and currency troubles is the growing discrepancy in earnings by class.

Whatever one’s opinions are on the minimum wage and class earnings, the facts are that the lower and middle classes are losing the most value in their earnings through inflation. So in this instance, while one could argue that not all participants have had their wages devalued by inflation, since the majority of society is impacted and the situation is progressively worsening, it makes sense to mark the US as showing this early symptom of hyperinflation.

United States symptom tracker: Runaway food prices ❌
                                                      Wages do not keep up with inflation ✅  

Symptom #3: Currency Substitution Into Alternative Stores of Value

Ok, so what, you say? All you care about is Bitcoin? Have no fear, we’re here. The good news is Bitcoin loves collapsing currencies. 

A currency is on its deathbed when a society loses faith in its ability to be a store of value, and when that happens, people seek alternatives to hold their wealth such as gold, and you guessed it — Bitcoin. Sometimes governments try to confiscate or acquire their citizens’ alternative assets to combat inflation, as has recently occurred in Turkey.

“I ask my citizens to invest their foreign currencies and gold in various financial institutions and bring [those assets] into the economy and production,” Erdoğan said on March 21st, 2021. He said the same thing in December of 2016 and again in 2018. 

Source: inflationtool.com

While Erdoğan disguises his demand to turn in foreign currency and gold in a veil of patriotic fervor, his plea masks his desperation. The Turkish lira depreciated even further against the dollar after Erdoğan fired his governor of the central bank on March 19th, 2021. Since 1956, the Turkish lira has inflated 921,861,308% and is expected to inflate another 12% this year. The goal behind acquiring his citizens’ alternative assets such as gold and foreign currencies is to force them to use the lira in an attempt to restore its implied value.

However, it is difficult to restore trust in a currency when it fails its basic function as a store of value. And so, Turkish citizens have turned to Bitcoin.

Source: Google Trends

Google searches for Bitcoin peaked in Turkey after news of the governor’s dismissal, while gold, typically heralded as the defacto inflation-resistant asset, received no more interest than usual. Onur Gözüpek, cryptocurrency consultant at crypto exchange BtcTurk | Pro, mentioned that because online banks had recently stopped exchanging US dollars and euros, BtcTurk’s USDT/TRY pair had the second highest trading volume after BTC/TRY. Turkish cryptocurrency exchanges currently do over $1 billion of volume per day. The demand for Bitcoin is so high that on some offline venues the price of Bitcoin was quoted at nearly $100,000 USD.

Listed below are other countries where Bitcoin and other alternatives have taken hold as a hedge against inflation:

  • As the crisis in Venezuela deepened, more and more Venezuelans looked to switch their bolívares into US dollars to trade with on the black market. Others sought refuge in Bitcoin as a way of having complete sovereignty over their finances. “Many Venezuelans are using Bitcoin to convert their bolívares, which are being permanently devalued by hyperinflation, to keep something of value,” says economist Asdrúbal Oliveros of Caracas-based consultancy Ecoanalítica. Gold, however, suffered in performance. Despite putting up 10,700% returns in bolívares, this wasn’t enough to outpace inflation, resulting in a real-return rate of negative 60%.
  • With inflation rates of 19.2% per year since 1979 and overall inflation of 80,349.39%, Nigeria was the perfect home for Bitcoin to take root. One of the most widespread adopters of crypto in the African continent, Nigerians flocked to Bitcoin for its cheap transaction fees for remittance, resistance to local inflation, and its wild investment returns. Nigeria is the second largest market for Bitcoin on the peer-2-peer Paxful exchange after the US, with Bitcoin at one point trading at $80,000, a 60% premium, in February of 2021. At a public hearing, Nigerian Senator Sani Musa declared, “Cryptocurrency has become a worldwide transaction of which you cannot even identify who owns what. The technology is so strong that I don’t see the kind of regulation that we can do. Bitcoin has made our currency almost useless or valueless.”
  • It’s worth noting another modern instance of hyperinflation in Brazil, during the two decades of 1980-2000, when inflation rose to 13,000,000%. During this time, gold was expected to do well as a hedge but lost 70% of its value instead.

United States Currency Substitution

What about the United States? Is the everyday citizen looking for ways to protect their assets against inflation? And what about gold? While gold bugs love to tout their physical investment as the endgame of inflation resistance, times may be changing.

Source: Twitter @CharlieBilello from YCharts

It’s no secret that Bitcoin is the best performing asset of the decade, posting 230.6% annualized returns and a whopping 20,037,142% cumulative return since 2011. We’ll talk about stock performance during hyperinflation in the next section, but for now let’s look at gold. Gold has barely ranked above cash since 2011, meaning you would do well to hold anything but gold if you were looking for aggressive returns, even if you were afraid of hyperinflation.

But let’s throw gold a bone. It has performed well in the past… a long, long time ago. For example, during Germany’s five-year hyperinflation period we covered previously, the price of gold increased 1.8 times faster than inflation, meaning that holders of gold in the Weimar Republic not only saved their purchasing power, but doubled it by the time the German mark collapsed. Today, however, it seems as if investors have their appetite on everything but gold.

As for the damning sickness that is currency substitution, it’s fairly obvious that even hardcore Bitcoin maximalists still enjoy seeing their dollars go up in value, and in the US no one is trading foreign currencies on the black market or bartering to acquire food and services. Perhaps even more damning for gold, fan favorite Federal Chairman Jerome Powell recently called Bitcoin a “more speculative asset that’s essentially a substitute for gold rather than for the dollar,” reassuring citizens, or maybe just himself, that the dollar will remain a store of value.

2020-2021: Jerome Powell stimulating the economy with stores of value

United States symptom tracker: Runaway food prices ❌
                                                      Wages do not keep up with inflation ✅ 
                                                      Currency substitution into alternative stores of value ❌ 

Symptom #4: Bubble Markets?

Bubble, bubble toil and trouble. Market bubbles are not typically a symptom that one associates with hyperinflation, perhaps because we’re all making too much money to care. But there are numerous examples where markets like to bubble over as they outpace rampant inflation and the reason is simple — human psychology.

Source: goldonomic.com, 2005-2008 Zimbabwe industrial index

In a desperate attempt to outpace a horrifying 89.7 sextillion (10^21) percent inflation, Zimbabweans poured their dollars into the stock market as it posted record 241% gains in one day, with some companies posting 3,500% returns.

An October 2008 Business Weekly article stated that investors in Zimbabwe believed the stock market was the only place to get a return on money.

Similarly in the Weimar Republic, Germans began to speculate in stocks as inflation worsened. In When Money Dies, by Adam Fergusson, he noted that:

 “Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights…… As regards to dealing in shares, all classes of the population have for months been speculating with a fine disregard for common-sense. Shares have been freely bought in totally unknown concerns, in some cases with the object of exchanging valueless paper money for what was considered a good security, but generally in the hope of profiting by a rise in the stocks. The population was now engaged in evading taxation and devoting their money to speculative purchases….”

The following chart shows the German stock market in marks and USD, showing that while the USD value did dip substantially towards the end of 1922, it experienced incredible returns in both USD and marks for the next year and a half.

Here are some other stock markets that bubbled in a response to hyperinflation:

  • Amidst runaway inflation, Venezuela’s stock market experienced 114% returns versus the DOW’s 13% in 2016. Citizens turned in their bolívares for seemingly “safer” investments like stocks.
  • Despite capital inflows into the Nigerian market slowing over 79% in Q2 2021, the Nigerian stock exchange index almost doubled its returns from April 2020 to 2021. Investors’ doubts in the bond and credit market have forced them to turn to Nigerian “blue-chip” companies in an effort to find returns.

United States Bubble Markets

Frothy is a word many have used to describe US capital markets. Concerns about the M2 money supply skyrocketing, especially during this COVID stimulus era, have investors eyeing inflation-resistant returns wherever they can get them.

Source: Macrotrends.com, S&P 500 returns of the last decade

There is still much debate about whether the money supply shock could lead to hyperinflation, or if it’s merely a nudge the economy needs to get back on track. Regardless, the Nasdaq (48.6%), Large Caps (18%), and Small Caps (20%) have all posted outsized returns in 2020 as investors continue to have an appetite for risk. 

Source: Twitter @CharlieBilello from YCharts

Perhaps you don’t agree with the definition of Bitcoin as the new “digital gold.” The argument could be made that Bitcoin just falls under the category of a risk asset, albeit the best performing one, and just another indication of how much investors are willing to risk while the market runs hot. In any case, the markets in the US are indeed bubbly.

United States symptom tracker: Runaway food prices ❌
                                                      Wages do not keep up with inflation ✅ 
                                                      Currency substitution into alternative stores of value ❌ 

                                                       Bubble markets?  ✅  

Prognosis: What is the Future of Bitcoin?

To recap: The United States ticks off some symptoms of hyperinflation and there are growing concerns it could worsen, but right now we are navigating a COVID economy and the future remains uncertain. Food prices haven’t outpaced the wages of the majority of the population, even as earnings continue to diverge between the lower, middle, and upper class. There is no need for concern about the substitution of the dollar (sorry Bitcoin maxis); however, there is concern about the increase in the money supply and how that might cause runaway inflation. There is rhyme in history as it pertains to market bubbles, and it’s hard to argue that the extreme gains in the S&P 500 are reflective of the overall health of society.

Therefore, the path for Bitcoin diverges as follows:

  1. Bitcoin replaces the US dollar. For this to occur, the US would have to undergo massive hyperinflation to the point where citizens no longer trust the dollar to pay for goods and services, can no longer afford to keep pace with their wages, and choose Bitcoin over gold as a safe haven asset. This seems a very unlikely doomsday scenario and, arguably, we’d have a lot more to worry about if the dollar lost its value entirely.
  1. Bitcoin replaces gold. For Bitcoin enthusiasts this is a more likely outcome. For this to occur, investors would have to shift their perspective from implicitly valuing physical goods to valuing digital ones. This is arguably already underway, both in the continuing and increasing interest in Bitcoin as an asset and developments in the DeFi and NFT space. While NFTs have yet to prove themselves as a replacement for physical collectibles, the trend is well underway, as you’ll see in our NFT section of this report.

Source: Google trends, interest over time of Bitcoin versus gold in the last five years.

What would it look like if Bitcoin replaced gold? Let’s start with something realistic and ask what happens if Bitcoin took over just a percentage of the market capitalization of gold.

In a tweet on January 13th, 2021, Ki Young Ju of CryptoQuant projected that the price of Bitcoin would be $154,000 if bitcoin replaced 10% of gold’s market cap. At the time, certain news sources had claimed that Bitcoin had taken up 7% of gold’s $10 trillion market cap. Ki Young Ju argued that this was false and Bitcoin was closer to 2% of gold’s market cap because of Bitcoin’s realized market cap, which excludes lost, unclaimed, and unreachable Bitcoin supply. 


According to CryptoQuant’s information, Bitcoin’s realized market cap has grown to $340 billion with a nominal price of $55,000 as of March 28th, 2021. But what if we project the realized market cap of Bitcoin to actually take over gold’s market cap of about $11 trillion?

Data source: Cryptoquant.com, projections calculated from the first two data points

Dramatic. If Bitcoin increased its realized market cap by 50% each year until 2030, it would surpass gold with over $13.1 trillion in capitalization and be worth $2,114,385. Just half of gold’s current capitalization would put it around $700,000, and 10% would be somewhere around Ki Young Ju’s prediction of $150,000 to $170,000.

While these predictions seem far-fetched, it is incredible that Bitcoin has even 2% of gold’s market cap after just ten years as a financial asset, when just a year ago $50,000 seemed like a pipe dream. 

Bitcoin, then, shouldn’t rely on the complete destabilization of society to become valuable, as we have seen that food, wages, markets, and even gold all suffer in the chaos of hyperinflation. However, perhaps Bitcoin could destabilize gold in the next decade or so and be a modernized “hard asset,” our digital gold for the new era.