text: InFocus: Six hyperinflationary scenarios for the USIn last week’s Economic Early Warning (06 JAN 22), I shared some notes on hyperinflation. It’s important to reiterate that hyperinflation is not merely extreme inflation, but a loss of faith in the dollar. In probably the most well-known case of hyperinflation, merchants in Weimar Germany simply stopped accepting the German mark, demanding some other form of payment, such as precious metals, jewelry, furniture, or foreign cash. It’s difficult to imagine a scenario where the local grocery store refuses to accept dollars, but it’s not impossible. Today, I’ll share several ways in which the United States could experience hyperinflation, ranked roughly from more likely to less likely.The Fed’s 10×10 scenario gone awry. The Federal Reserve may be forced into much higher rates of inflation, regardless of political consequences. Right now, the Biden administration is pressuring the Fed to reduce inflation as voters head into the midterms. While high inflation is politically unpalatable, the Fed may pursue something like a 10% annualized rate of inflation over 10 years so the US Government can reduce its debt to sustainable levels. As noted below, Fed chairman Jerome Powell this week called the US national debt situation “unsustainable,” adding that “it is best to address it soon.” Although Fed officials maintain that this option is not being considered, in this scenario, the US Treasury would be able to pay down its debt faster through inflated dollars. The risk here is that the Fed loses control of inflation. The Fed’s credibility has become strained over the past year due to its adamant characterization of inflation as being “transitory,” however, the Fed does have a much longer track record of policy errors. During the Great Inflation, for instance, the Fed had a difficult time taming inflation that persisted over 10 years. Under Paul Volcker, the Fed finally raised interest rates to 18-20% in the late 1970s and early 1980s, which reduced inflation but also caused a double-dip recession. Today, the Fed will be able to raise interest rates only by so much because higher interest rates means more expensive debt and slowing economic activity to the point of recession. The Fed will have a difficult time balancing higher interest rates with slowing economic activity, a deliberately weakened dollar with higher rates of inflation, and increased strains on the entitlement-heavy federal budget with printing up the budget shortfall. If international investors lose faith in the Fed’s ability to stabilize the dollar’s value, then they begin to dump the dollar, which could accelerate into a cascading hyperinflationary scenario.A domestic conflict. As I described last week, most of the world’s cases of hyperinflation have come as the result of war. Domestic conflicts especially tend to destroy economies. Erosion of the tax base and government revenues due to economic destruction would likely lead the Federal Reserve to print more money to fund the government. A high intensity civil war that brings economic devastation would likely shake the world’s confidence in the US Dollar as a safe haven asset, which could lead to foreign investors and central banks dumping the dollar in favor of a more stable currency. Even a low intensity conflict, such as an American version of the Irish Troubles, would likely bring attacks against strategic and symbolic targets, and a protracted conflict would likely result in the exercise of greater government authority, which would likely diminish foreign investment and use of the dollar. Hyperinflation could occur if global sell-off of the dollar accelerates, causing bank runs and sensitivity to holding money (i.e., spending it quickly), which is highly inflationary.