Stocks During Hyperinflation

[Gumby]

JPMorgan just published a report about how different assets behave during hyperinflationary periods.

From JPMorgan:

During Weimar the German population started to speculate in stocks. From When money dies: "Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights…… The population was now engaged in evading taxation and devoting their money to speculative purchases…. Shares in respectable concerns which had paid a 20% dividend, were pushed higher and higher till the final holders could not expect a return of even 1%."

The next chart shows the performance of the German stock market in marks and USD. It is clearly visible that that the stock market did not fall measured in marks, but was more volatile in USD. We we're not able to find data for property, but believe the chart would have shown a similar pattern (ie. prices up in nominal terms, but not necessarily in real terms). In addition, we believe that ‘unique’ property would have held its value better compared to the overall market.

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Source: BI: Here's What Happened To Stocks During The German Hyperinflation

[melveyr]

I have poked my head into the book and it is a great read. Another fascinating finding is that unemployment was practically non-existent.

I remain firmly in the camp that inflation is largely a redistribution of wealth from the nominal savers/retirees to the producers and laborers. It is bad but not nearly as catastrophic as deflation.

With deflation you have unemployment. What is worse than idle labor? If economics is about allocating scarce  resources, than unemployment is a a terrible failure. Worse than any inflation.

[Tortoise]

What is worse than idle labor?

In some cases, misallocated labor.

Whereas idle labor simply fails to produce new wealth, misallocated labor has the potential to actually destroy existing wealth.

To the extent that inflation can encourage the misallocation of labor, it might under certain circumstances be worse than deflation. (In the late '90s dot-com boom, many productive laborers quit their jobs to become day traders. And in the mid-2000s real estate boom, many productive laborers quit their jobs to become real estate agents. So not only were those former laborers not producing the resources they were previously; they were consuming resources in the process of trying to get rich quick.)

[stone]

The mid 2000s real estate boom in Europe caused a million people to leave Poland to come to Ireland and the UK to work on construction sites building homes that have never been sold and in some cases have since been demolished because it was realized that they would never be occupied. A friend of mine was a school teacher in Poland but came to work just carying stuff around on construction sites in the UK. The type of people who left Poland were dynamic hard working people. The type of people who potentially were most needed for post-communist reconstruction in Poland. To some extent it could be said that almost all of the current finance, insurance and real estate industry is also an artifact of asset price inflation. If there was price stability of assets, then all of that labour would be free to do something productive.

I thought that the Wiemer hyperinflation only got hyper when supply crashed due to large scale strikes. Zimbabwe also had a supply crash when farms were confiscated. The Zimbabwe hyper inflation had 80% unemployment. The classic recipy for hyperinflation requires a shortage of essential goods. I'm sure the UK only avoided hyperinflation in the post WWII period because we had the imposition of rationing to cope with supply shortages. I suppose in principle if everyone gave up their jobs to become day traders then that could also cause a supply crash.

I also think that involuntary unemployment does amount to destroying "wealth". Once an hours labour has been left unused it is gone forever. Our time is the ultimate perishable resource. Youth unemployment is even worse if it results in a lack of a trained workforce. To my mind capitalism works when capital accumulation coincides with making best use of resources taking into account which resources are ireplacable and which are entirely perishable. Man hours are 100% instantly perishable.


I read something about the hyperinflation in Chile saying that stocks and realestate became worthless relative to food and transport out of the country. Apparently one current Chilean oligarch didn't have enough USD to emigrate and so spent it on Chilean stocks. When the hyperinflation ended he became extremely rich from those shares. I think "vulture fund" types would love to cause hyperinflation. As wealth accumulates, they will get the resources to induce it for their own ends.

[Lone Wolf]

Another fascinating finding is that unemployment was practically non-existent.

You're leaving out what happened at the end.  Unemployment soared in the late stages of the Weimer hyperinflation.

Certainly at the onset of such an inflation, people will do anything to find work (if it can be found.)  Their savings are evaporating before their eyes and they need to eat.  What choice do they have?  In the case of Weimar, they accepted wages that were falling in real terms because their savings were disappearing so quickly that they would starve if they didn't work.

Ultimately, the markets were so destabilized by hyperinflation that it made no sense to trade real goods for worthless currency.  Then the trading dried up.  Finally, the jobs dried up too.

With deflation you have unemployment. What is worse than idle labor? If economics is about allocating scarce  resources, than unemployment is a a terrible failure. Worse than any inflation.

I think you're assuming a relationship between inflation and employment that doesn't actually exist.

As I mentioned above, employment fell apart in Weimar's late stages.  As stone said, Zimbabwe's unemployment situation was also an unmitigated disaster (80%!).  The US in the 1970s saw high unemployment at the same time as high inflation.

On the other hand, the United States went through a net deflation throughout the Industrial Revolution, yet this was a time of great prosperity and overall extremely low unemployment.  And Japan didn't experience the high unemployment that's "supposed" to happen through a deflation.

Inflation is a much, much nastier beast than you give it credit for.