A major hedge fund fears 'hyperinflation' in some developing nations. This is why it could still affect America.

A major hedge fund fears 'hyperinflation' in some developing nations. This is why it could still affect America.
Venezuelan Bolivars and US dollar bills at a market in Caracas.Matias Delacroix/AP
  • There are fears that some nations could be struck by hyperinflation, or uncontrolled price rises.
  • Hyperinflation destroys the value of currencies and could inspire a new debt default crisis.

As the US economy bats off myriad pressures in the face of a likely recession next year, it might face a new threat: the fallout of potential hyperinflation in emerging markets.

In a letter reported by the Financial Times earlier this month, Elliot Management, which manages assets worth $56 billion, said the world was on the path to "hyperinflation" and the worst economic climate since the end of the second world war.

The hedge fund said an "everything bubble" – instigated by cheap money pumped into the economy during the pandemic – had left global markets horrifically exposed to sustained high prices.

"Investors should not assume they have 'seen everything'," the fund wrote, as it warned the situation could descend into "global societal collapse and civil or international strife."

While hyperinflation is not about to strike the US, it could affect the American economy nonetheless.


What is hyperinflation?

Hyperinflation happens when prices rise at exorbitant rates, massively devaluing a currency. The World Bank cites a definition where inflation grows at a monthly rate of 50% or more per month. There are several previous examples that demonstrate the pain it can cause.

In the wake of the first world war, as Germany's Weimar Republic printed too much money to service debts, mostly owed to the victorious Allies as war reparations, and the prices of goods soared. A loaf of bread jumped from $3.50 in mid-1922 to $1,200 in Spring 1923, while households burned cash instead of wood to heat their homes because it was cheaper, Insider has reported.

In 2017, prices in Venezuela soared by nearly 1,000% amid economic, social, and political upheaval, forcing people to pay for everyday goods with huge amounts of cash. Its currency was devalued by 96%.

As in the cases of interwar Germany and late-2010s Venezuela, hyperinflation usually only happens as part of broader deep political, economic, and social instability. The US and other wealthy developed countries are unlikely to suffer a similar crisis, however emerging economies could get caught in a perfect storm of rising interest rates, sanctions on energy and food following Russia's invasion of Ukraine, and the effect of China's aggressive zero-COVID strategy.

The director of Boston University's global development policy center Kevin Gallagher told Insider this combination of factors could set off a set of events that stretch across the global economy and back to the States.


Debt defaults

Gallagher said the worsening economic climate could spell a debt crisis for emerging nations, and it has its roots in US policy.

In an attempt to quell decades-high inflation, the Federal Reserve has begun quickly raising interest rates, a policy other central banks have followed, making the cost of borrowing more expensive. It also appears likely to push the US into at least a shallow recession next year.

Another consequence of that policy was to send money out of emerging economies and back to the US. A strong dollar and higher interest rates attract capital, Gallagher said, reducing the value of their currencies and making imports more expensive.

"If you need dollars to be able to pay for food, energy, and just about anything else you import, you're in trouble," he said.

While Gallagher said hyperinflation wasn't happening yet, the frameworks in place to protect emerging economies from hyperinflation and a debt default were breaking down, leaving countries to fend for themselves.


Back to the States

Gallagher said an end to the war in Ukraine, China loosening its aggressive pandemic policies, and a focus on supply-side reform were the easiest way to neuter any threat of hyperinflation in emerging markets. Adding that the US won't be immune from potential consequences.

If several countries defaulted on their debts, global trade could be hampered, exacerbating supply chain issues that are contributing to inflation in the US, he said. Stock markets could also suffer more pain.

A humanitarian crisis could also beckon. Hyperinflation, in addition to violence and shortages, displaced six million Venezuelans, the UN reported.

"Impacts in the US might not be huge in terms of economics, but the lack of action politically will hurt us globally," Gallagher said.