Robert Kiyosaki is (once again) stirring up controversy about the future of the American economy, saying that hyperinflation is coming.
But what exactly is hyperinflation, and what causes it? And is Kiyosaki right that we should all be panicking right now?
We’ll cover the definition of hyperinflation, what Kiyosaki said, and what you should focus on instead to help lower your financial stress.
What is hyperinflation?
Hyperinflation happens when a country’s currency becomes completely rejected by citizens as having any value, and the government attempts to build confidence by printing more money.
This is a complete collapse of a country’s sovereign currency, not simply excessive inflation and money printing.
Hyperinflation is typically the result of a poor outcome of a war, massive government corruption, or a regime change that breaks current monetary policy and trust.
Even the most recent examples of hyperinflation were not caused by government overspending or higher costs.
Events like a civil war and a complete regime change caused excessive money printing and, eventually, citizens' total rejection of the local currency.
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Examples of hyperinflation
Hyperinflation has a detailed history, and you can review some examples of why it happened:
Yugoslavia, 1994. Political turmoil, regional conflicts, and borrowing from the International Monetary Fund (IMF) caused a loss of trust in the dinar. Local businesses rejected the currency, adopting the German Deutsche Mark (DM) instead. This caused prices in local currency to double every few days and destroyed the Yugoslavian dinar.
Greece, 1944. Greece was occupied for much of World War II, and this, along with excessive borrowing to cover military expenditures, vastly reduced production (thus reducing tax revenues). Citizens rejected the drachma (Greek currency), while the Bank of Greece doubled the money supply, causing hyperinflation of over 13,000% within a month.
Germany, 1923. Germany went off the gold standard to back the Papiermark and borrowed to fund military operations into World War I. Germany lost and was forced to pay reparations in foreign currency or gold. It defaulted on these debts, further devaluing its currency, and hyperinflation set in. At one point, prices rose over 29,000% within a month.
What did Kiyosaki say?
Robert Kiyosaki, the best-selling author of the 1997 book "Rich Dad, Poor Dad," sounded the alarm about hyperinflation on a recent podcast with guest Andy Schectman. He stated the U.S. dollar would be devalued to the point it would no longer be the world reserve currency.
“So, there’s gonna be quadrillions of dollars coming back, and the ramifications of that are possibly … hyperinflation,” he stated, “And this thing [U.S. dollar] goes to trash. This becomes toilet paper. This little dollar here. Because there’s so much of it out there.”
Of course, Kiyosaki is no stranger to doom and gloom predictions. While he did release a popular book 25 years ago, he has since adopted a very negative view of the American economy and continues to predict its downfall.
And while the economy is in a challenging position with high interest rates and inflation, like most Kiyosaki predictions, they have not come to fruition.
Now let’s look at a few reasons you shouldn’t worry about hyperinflation.
The U.S. dollar is the world’s reserve currency
While much is made of the BRICS (Brazil, Russia, India, China, and South Africa) rejection of the U.S. dollar as the currency of trade around the globe, the truth is nearly 60% of the world's monetary reserves are held in U.S. dollars.
Switching from the U.S. dollar to another currency would be a monumental task for two-thirds of the globe.
This doesn’t mean U.S. dollar dominance isn’t declining (it is), but it is not happening suddenly. The dollar has gone from around 70% of the world’s reserves to 59% in 23 years.
And the nearest competitive currency (the euro) has climbed from around 18% to 21% of the world reserves in that same period.
America and its currency are backed by the world’s most powerful military
According to Statista, the U.S. has the most powerful military in the world. And while there hasn’t been a full world war in over 75 years, the U.S. is positioned as a powerful military force globally, ultimately protecting the U.S. dollar.
Hyperinflation can be caused after a war, especially if there's excessive borrowing or printing money to help pay for war costs. This can cause citizens to lose faith in the currency and eventually reject it altogether.
The U.S. dollar is also backed by a very productive workforce
While the U.S. dollar is no longer backed by gold, it is backed by one of the most productive workforces in the world.
The U.S. output is 15% of the world’s Gross Domestic Product (GDP), just a few percentage points behind China. This makes the U.S. dollar a secure currency backed by actual output.
America has a lot of assets
While the U.S. has printed a lot of money in the last decade, it also holds a lot of assets. In fact, America is still the world's largest holder of gold reserves, with over $400 billion.
It also holds nearly $250 billion in other reserves, including gold stocks and foreign currencies.
This makes the U.S. dollar much safer than a currency that doesn’t have hard assets and other reserves.
When it matters the most, U.S. politicians find a way to work together
Yes, political turmoil seems like the norm these days. But when push comes to shove, if the U.S. dollar dominance becomes threatened, politicians come together to protect the integrity of American currency dominance.
For example, in 2019, Republicans and Democrats proposed a bipartisan bill to help make the U.S. dollar more competitive in world trade.
While the two main political parties in the U.S. don’t agree on much, protecting the U.S. dollar is something both parties support.
Inflation is currently slowing (as measured by CPI)
Inflation went as high as a 9% year-over-year increase in 2022, but the recent interest rate hikes are finally having their intended effect — inflation is going down.
The Consumer Price Index (CPI) is the standard measure used by the U.S. to track inflation, and the average CPI is around 3% per year.
Recent CPI numbers show that inflation is down to 4.9% year-over-year, nearly half what it was a year ago. And while it’s still high by historical standards, it's nowhere near the 10,000%+ that indicates hyperinflation.
It’s usually a bad idea to bet against America
Even if you don’t think the U.S. dollar is going into hyperinflation, you might believe its days of dominance are over. But one of the best investors in the world, Warren Buffett, is still “all-in” on America.
In a 2021 letter to investors, Buffett says, "In its brief 232 years of existence ... there has been no incubator for unleashing human potential like America.” He concluded his remarks by saying, “Never bet against America.”
While this may be a bit of patriotism, Buffett is also putting his money where his mouth is, and his company is the country's largest holder of U.S. assets. Clearly, Buffett isn’t anticipating hyperinflation. Otherwise, he’d position his investments very differently.
America is still a young nation
While America has a storied history, it is still historically a young nation. America established its independence in 1776, nearly 250 years ago. But this is a much shorter history than countries like China and India, which are four millennia old.
This means there's still a lot of growth ahead, and America is still learning to navigate its place as the world monetary leader.
Establishing itself as the world military power and economic leader in such a short period should build confidence in America's ability to avoid a complete economic collapse.
You’re better off worrying about things you can control
Hyperinflation is a scary topic if you envision it happening in your home country. But much of what causes hyperinflation is out of your control, and constantly worrying about it is not productive.
Instead, focus on what you can control, such as how much you invest, where you invest (local and international), and how you handle your money day-to-day.
And if you still think hyperinflation is coming, you can always invest in commodities and alternative assets that may benefit if the worst does come true.
Hyperinflation is not simply prices going up more than average inflation. Instead, it’s a complete collapse of the sovereign currency in a country.
And while there are headlines and stories hyping up the possibility of it happening in the U.S., we are far from this becoming a reality.
The most important thing is to focus on what you control and ignore the noise. This will also help you build more wealth.