A large hedge fund is concerned about the effect of "hyperinflation" in America | Paragon Alpha

A large hedge fund is concerned about the effect of "hyperinflation" in America

By Matea Gucec

The effects of potential hyperinflation in emerging nations could pose a new challenge to the US economy as it fights against numerous pressures in the face of an impending recession next year.

The $56 billion in assets managed by Elliot Management said in a letter published by the Financial Times earlier this month that the globe was headed for "hyperinflation" and the worst economic situation since the conclusion of World War II.

The hedge fund claimed that an "everything bubble" caused by cheap money injected into the economy during the pandemic had left international markets horribly vulnerable to persistently high pricing.

The fund cautioned that the scenario might turn into "global societal collapse and civil or international violence" and advised investors not to believe they have "seen everything."

Although hyperinflation is not poised to hit the US, it could nevertheless have an impact on the country's economy.

How does hyperinflation work?

When prices increase at astronomical rates and a currency is severely devalued, this is called hyperinflation. According to the World Bank, inflation is defined as a monthly growth rate of at least 50%. There are numerous prior instances that show how painful it can be.

Following the First World War, prices of products rose as Germany's Weimar Republic produced too much money to pay for obligations, mostly war reparations owed to the victorious Allies. According to Insider, households burnt cash instead of wood to heat their homes since it was less expensive, and a loaf of bread increased in price from $3.50 in mid-1922 to $1,200 in spring 1923.

In the midst of ongoing economic, social, and political unrest in Venezuela, prices increased by around 1,000% in 2017, forcing citizens to pay exorbitant sums of money for basic necessities. Its currency lost 96% of its worth.

Hyperinflation almost never occurs on its own; as in the situations of interwar Germany and late-2010s Venezuela. Instead, it always occurs as a result of severe political, economic, and social instability. However, emerging economies could be hit by a perfect storm of rising interest rates, sanctions on energy and food following Russia's invasion of Ukraine, and the impact of China's aggressive zero-COVID strategy. The US and other wealthy developed countries are unlikely to experience a similar crisis.

This confluence of variables, according to Kevin Gallagher, director of Boston University's global development policy center, could trigger a series of events that ripple through the world economy and eventually return to the United States.

Defaults on debt

According to Gallagher, the worsening economic situation, which has origins in US policies, might lead to a debt catastrophe for developing countries.

The Federal Reserve has started swiftly boosting interest rates, a strategy other central banks have adopted, in an effort to stem decades-high inflation. This raises the cost of borrowing. Additionally, it seems likely to cause at least a mild recession in the US the following year.

Sending money back to the US from emerging economies was another effect of that program. According to Gallagher, a strong dollar and higher interest rates draw money, depreciating their currencies and raising the cost of imports.

Gallagher claimed that although hyperinflation had not yet occurred, the systems in place to safeguard emerging economies against both hyperinflation and a debt default were disintegrating, leaving individual nations to fend for themselves.


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