Twitter and Square CEO Jack Dorsey recently fanned fears of hyperinflation emanating in the US and then the globe. But Cathie Woods, founder, CEO and CIO of Ark Invest, took to Twitter to dispute his statements.

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“Hyperinflation is going to change everything. It’s happening,” Dorsey tweeted out on October 23.

“It will happen in the US soon, and so the world,” the billionaire added.

https://twitter.com/jack/status/1451733913961783299

The spectre of hyperinflation has quickly emerged as a bogeyman for critics of the US Federal Reserve, critics of the Biden Administration, crypto enthusiasts, and several fringe political groups.

The groups fear that the excessively accommodating policies adopted by the US Federal Reserve, among other national central banks, through quantitative easing and fiscal stimulus have introduced too much money into the economy, which will rapidly lead to inflation once the slump from COVID-19 is overcome.

What is hyperinflation?

In simple terms, inflation is the rate of increase in the general price level of any economic system. It is calculated by comparing the price of certain goods and commodities like food, energy and fuel each year.

Most central banks prefer to have a relatively stable yet positive level of inflation since it is better than the alternative of a recession. But hyperinflation is defined as rapid, excessive, and out-of-control general price increases in an economy, usually measuring more than 50 percent increase in prices per month. Venezuela is currently in a state of hyperinflation with a 3,012 percent inflation rate, while countries like Sudan, Zimbabwe and Lebanon have very high inflation rates as well.

Also read: Jerome Powell says inflation risks rising, but Fed can be 'patient'

According to studies and research, hyperinflation only occurs in very specific circumstances, including in the aftermath of war, when fiscal authorities lose control; or as a result of populist monetary policies.

The absence of hyperinflation does not rule out high inflation. Many experts believe that the US could see inflation of 3-4 percent by 2022, with US Treasury Secretary Janet Yellen stating that she believes that inflation will come down to acceptable levels by 2022. Even such a marginal rate can drastically reduce consumers’ purchasing power, cut down corporate margins and reduce the value of assets significantly.

Also read: Explained: What fans US inflation fears

Wood’s rebuttal

While most experts agree that inflation, not hyperinflation, is bound to affect the US economy, Wood has a contrarian theory. Wood suggests that the nation will soon be experiencing deflation instead. Deflation is the decline of the price level of goods and services, brought on by the reduction of free-flowing money and credit, and from increased productivity and technological improvements. Deflation happens when the inflation rate is below 0 percent.

Also read: Dollar catches footing as inflation pressures rates outlook

"In 2008-09, when the Fed started quantitative easing, I thought that inflation would take off. I was wrong. Instead, velocity -- the rate at which money turns over per year -- declined, taking away its inflationary sting. Velocity still is falling," Wood said in a tweet.

In 2008-09, when the Fed started quantitative easing, I thought that inflation would take off. I was wrong. Instead, velocity - the rate at which money turns over per year - declined, taking away its inflationary sting. Velocity still is falling. https://t.co/tFaXSaCKqS

— Cathie Wood (@CathieDWood) October 25, 2021

Wood believes that technological advancements will be responsible for the next bout of deflation.

“Now we believe that three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy. Two sources are secular, or long term, and one is cyclical. Technologically-enabled innovation is deflationary and the most potent source,” she added in her Twitter thread.

Also read: Explained: How rising inflation in the US is impacting Indian stock market

Wood noted that AI-training costs had already reduced by 40-70 percent, which is going to be responsible for many of the cost reduction breakthroughs for companies. “AI is likely to transform every sector, industry, and company during the 5-10 years.”

"When costs and prices decline, velocity and disinflation -- if not deflation -- follow. If consumers and businesses believe that prices will fall in the future, they will wait to buy goods and services, pushing the velocity of money down," she added.

Wood also stated that companies that have catered to the short-term goal of satisfying investor demand through creative accounting, to increase earnings per share and dividends, will be facing the heat for not investing in innovation. As these companies struggle to keep up, they’ll have to let go of assets at discounted rates in order to keep debt at bay.

“The third and most controversial source of deflation is cyclical. Because businesses shut down and were caught flat-footed as goods consumption took off during the coronavirus crisis, they still are scrambling to catch up, probably double- and triple-ordering beyond their needs,” Wood further added.

“As a result, once the holiday season passes and companies face excess supplies, prices should unwind. Some commodity prices -- lumber and iron ore -- already have dropped 50 percent, China’s crackdowns are one of the reasons. The oil price is an outlier and psychologically important.”

Wood further stated that newer mandates and regulations from governments and ESG pressure from investors would see companies quickly divest away from fossil fuels to renewable sources instead.

“On the supply side, ESG (environmental, social, and governance) mandates have forced energy companies to shift capital spending from mature fossil fuels to nascent renewables. Meanwhile, banks have deprived fracking companies of funding after their near-death experience in 2020,” said Wood.

Wood added that increasing EV adoption would also be a death knell for the fossil fuel industry. “In response to the near quadrupling of oil prices since the low last year, electric vehicle adoption has accelerated, sowing the seeds of a serious oil price decline longer term.”

(Edited by : Shoma Bhattacharjee)

First Published:Oct 26, 2021 7:03 PM IST