Exponential Inflation vs Hyperbolic Inflation

Chris Martenson has an interesting article entitled Our Money is Dying over at Peak Prosperity.  In it, he talks about the "inflationary spectrum", which consists of:

1. Non-inflationary price increases
2. Simple inflation
3. Loss of confidence in money
4. Hyperinflation, and finally
5. Currency destruction.  

See the article for a description of each.

Rather than seeing a single "inflationary spectrum", I instead see two quite distinct inflationary forces - one that is exponential, and one that is hyperbolic.  Let's briefly take a look at an exponential and hyperbolic functions (graphs):

The shapes, slopes, and positioning of the graphs come in many forms.  The key difference between exponential and hyperbolic, as explained by Wikipedia, is that:

• exponential growth grows to infinity as time goes to infinity (but is always finite for finite time),
• hyperbolic growth has a singularity in finite time (grows to infinity at a finite time).

Put another way, hyperbolic growth trajectories have a D-Day - a day of reckoning.

Now, relating this back to inflation, I have a crude (yet instructive) Inflation formula:

Dollar prices = Number of Dollars / Trust in Dollars.

Where:

• Dollar Prices: is any rough measure of prices, eg, CPI, PPI, etc.
• Number of Dollars: is any measure of dollar quantity, eg, M0 ... M3, etc.
• Trust in Dollars: is some measure between 0 and 1 that represents the average trust in dollars of each currency holder. The trust factor would half if either every body's trust halved, or half of the people lost all trust in the dollar.

So, the crude formula above caters for the both the exponential, quantitative effect of money supply on rising dollar prices, as well as the hyperbolic, qualitative effect of trust in dollars on rising prices.

The reason that I consider the "Number of Dollars" to have an exponential, rather than linear, impact on prices is that the sources of new money (printing and credit growth) tend to be determined as percentages of existing money supply rather than absolute amounts. Can you imagine the size of QE5?

This view of inflation aligns with the view over at FOFOA that standard inflation is very different to hyper-inflation.  Standard inflation is supply side driven (ie, more dollars), whereas hyperinflation is demand side driven ("Get those dollars away from my apples").

As I said above, my inflation formula is quite crude.  A better model would need to be far more dynamic, and would need to take into account the inherent feedback loops, such as how "more dollars" impacts rising prices over time, and how "rising prices" impacts on the trust in dollars over time.

Such a dynamic model would also need to take into consideration that new money flows into different types of assets at different rates, and also that the flow into some assets can delay flow into other asset classes.  This is why we don't immediately see the impact of monetary inflation in consumer prices.  Assets classes just outside the consumer basket tend to see the new money first.  That is, money first flows into tech stock bubble prices, then housing bubble prices, as well as into new financial derivative products, and eventually - if there is any flow left - into consumer prices.

As interesting as it would be to build such a dynamic model, it's currently beyond the scope and time limits of the musings of this occasional blogger.

The key point though, as was Chris Martenson's, is that our money is dying, and that hyperbolic events transition from benign to blow-up very quickly.  When trust in dollars breaches critical mass, then end will no longer be nigh, it will be here.