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Servicing the debt usually just means paying interest on it and rolling it over. That's not going to cause hyperinflation. One hypothetical scenario that goes

Servicing the debt usually just means paying interest on it and rolling it over. That's not going to cause hyperinflation. One hypothetical scenario that goes into this direction though would be a severe supply shortage that drives prices up, and then wealthier folks (who are the holders of the debt) are able to price poorer folks out of the market. I don't think that in itself would give you hyperinflation though. Something else would have to happen as well,[0] and then the question is down to the nature of where this extreme supply shortage comes from. The most common cause of that kind of thing is war, and in war societies tend to suspend some aspects of the free market and introduce rationing to deal with these issues. [0] For example, consider the early Weimar republic where the government basically decided to cause hyperinflation because the alternative was to refuse payment of war reparations, and that wasn't politically feasible until the hyperinflation made it painfully obvious to everybody (both domestic and abroad) that Germany had to be allowed to at least partially default on those reparations. The point is, hyperinflation only happened because the government decided to keep injecting ever larger amounts of money into the economy -- but that can't be caused by existing debt. The existing debt is limited, so it could push on inflation for some time, but once that inflation has devalued the debt sufficiently, its "inflationary fuel" is spent. So I don't think existing debt can cause hyperinflation all by itself.

nostrademons 7y ago
The "hyper" part of hyperinflation often comes about through information cascades in the populace itself, not through anything the government does. If a critical mass of the population believes that money will be worth less tomorrow than it is today, they will change their behavior to get rid of all their money now rather than risking it becoming worthless tomorrow. This shows up as an increase in the velocity of money, the number of times a given dollar turns over. The money supply equation is MV = PQ (money supply * velocity of money = average price level * quantity of goods sold), so if V goes up while M and Q remain constant, P has to go up too. This pushes inflation expectations up even further, which causes further increases in the velocity of money, which creates a runaway feedback loop. That's how you get hyperinflation.
- atq2119 7y ago
  While there is flexibility in V, there is simply not enough leeway there for hyperinflation -- in hyperinflation you typically get an increase of prices by a factor of 1000000 or more. There's no way V can increase by that much. Consider salaries, for example. You can pay people daily instead of every two or four weeks, but that only gives you a factor 10 or ~20 (depending on what your baseline is). To get a factor of 1000 in the velocity of money, you'd have to give people their paycheck every 5 minutes or so and they'd have to immediately spend it. Getting to 1000000 is physically impossible. So hyperinflation can only happen when there's something that keeps injecting more money into the system, typically a combination of bank loans and government spending. Of course, the root cause of the hyperinflation isn't either of those things but some underlying economic problem (e.g. war reparations and Ruhr occupation in the case of the Weimar republic hyperinflation, a totally botched land reform in the case of the Zimbabwe hyperinflation). But the point is that if there's nothing that keeps injecting money into the system, the hyperinflation necessarily comes to a screeching halt. Edit: Of course there's a psychological aspect to it as well. Most cases of hyperinflation have a runup of very high inflation, and them some inflection point where things really take off. I've never read a really good study of what precisely causes these inflection points. I imagine it's some kind of policy change that is enabled by those psychological aspects. Whatever it is, the hyperinflation doesn't last long after those inflection points because that's when it becomes really obvious that things can't continue that way and the injection of money must stop.
  - nostrademons 7y ago
    Oftentimes the run-up in M needed to maintain hyperinflation comes from the need to maintain the loyalty of the army (and hence, keep yourself in power). A private business might choose to pay its people daily, but the government is constrained by its taxation infrastructure and bureaucratic delays to collecting much less frequently than that. If you're a group of guys with guns, and a wealthy private business owner can pay you $X today or the government can pay you $X which will be worth 1/10th as much at the end of the month, who do you work for? (Well, in practice the answer is likely to be "both of them", which is equally problematic for the government.) So the government makes up the short-term shortfall by printing money and increasing the denomination of bills. Now they've increased M, and the cycle continues.
mac01021 7y ago
> Servicing the debt usually just means paying interest on it and rolling it over. That's not going to cause hyperinflation. I agree it's hard to imagine getting to that point but, at least for me, that could simply be a failure of the imagination. If debt growth continually outpaces GDP growth until the interest (or, particularly, until the 20% of the interest that must be paid to other nations) is a significant fraction of the GDP, and then a recession hits, might that do it?

nostrademons 7y ago

The "hyper" part of hyperinflation often comes about through information cascades in the populace itself, not through anything the government does. If a critical mass of the population believes that money will be worth less tomorrow than it is today, they will change their behavior to get rid of all their money now rather than risking it becoming worthless tomorrow. This shows up as an increase in the velocity of money, the number of times a given dollar turns over. The money supply equation is MV = PQ (money supply * velocity of money = average price level * quantity of goods sold), so if V goes up while M and Q remain constant, P has to go up too. This pushes inflation expectations up even further, which causes further increases in the velocity of money, which creates a runaway feedback loop. That's how you get hyperinflation.

atq2119 7y ago
While there is flexibility in V, there is simply not enough leeway there for hyperinflation -- in hyperinflation you typically get an increase of prices by a factor of 1000000 or more. There's no way V can increase by that much. Consider salaries, for example. You can pay people daily instead of every two or four weeks, but that only gives you a factor 10 or ~20 (depending on what your baseline is). To get a factor of 1000 in the velocity of money, you'd have to give people their paycheck every 5 minutes or so and they'd have to immediately spend it. Getting to 1000000 is physically impossible. So hyperinflation can only happen when there's something that keeps injecting more money into the system, typically a combination of bank loans and government spending. Of course, the root cause of the hyperinflation isn't either of those things but some underlying economic problem (e.g. war reparations and Ruhr occupation in the case of the Weimar republic hyperinflation, a totally botched land reform in the case of the Zimbabwe hyperinflation). But the point is that if there's nothing that keeps injecting money into the system, the hyperinflation necessarily comes to a screeching halt. Edit: Of course there's a psychological aspect to it as well. Most cases of hyperinflation have a runup of very high inflation, and them some inflection point where things really take off. I've never read a really good study of what precisely causes these inflection points. I imagine it's some kind of policy change that is enabled by those psychological aspects. Whatever it is, the hyperinflation doesn't last long after those inflection points because that's when it becomes really obvious that things can't continue that way and the injection of money must stop.
- nostrademons 7y ago
  Oftentimes the run-up in M needed to maintain hyperinflation comes from the need to maintain the loyalty of the army (and hence, keep yourself in power). A private business might choose to pay its people daily, but the government is constrained by its taxation infrastructure and bureaucratic delays to collecting much less frequently than that. If you're a group of guys with guns, and a wealthy private business owner can pay you $X today or the government can pay you $X which will be worth 1/10th as much at the end of the month, who do you work for? (Well, in practice the answer is likely to be "both of them", which is equally problematic for the government.) So the government makes up the short-term shortfall by printing money and increasing the denomination of bills. Now they've increased M, and the cycle continues.

mac01021 7y ago

> Servicing the debt usually just means paying interest on it and rolling it over. That's not going to cause hyperinflation. I agree it's hard to imagine getting to that point but, at least for me, that could simply be a failure of the imagination. If debt growth continually outpaces GDP growth until the interest (or, particularly, until the 20% of the interest that must be paid to other nations) is a significant fraction of the GDP, and then a recession hits, might that do it?