The hyperinflation of a currency is typically described as an event, as if one day everything is normal and then the next day hyperinflation is manifest throughout the economy.
This description explains, for example, how the hyperinflations that destroyed the currencies in Germany in the 1920s, Serbia in the 1990s and Zimbabwe more recently are generally viewed.
Hyperinflations, however, are not spontaneous. They do not appear “out of the blue”. It is therefore more accurate to describe hyperinflation as a process. There are many steps taken on the road to hyperinflation that ultimately and eventually leads to the destruction of a currency.
The US government recently took a big leap down that road. When it suspended the debt ceiling, which is the self-imposed limit on how much it can borrow, it removed the last remaining check on the proclivity of politicians to spend money. It abandoned the last semblance of any discipline on federal spending.
In every year since the 2008 financial crisis, the US federal government has been incurring an operating deficit of more than $1 trillion. Because it is spending more than it receives in revenue, it needs to borrow dollars to fund these deficits. These borrowings cause its total debt to grow, so the debt ceiling must be raised periodically to enable it to keep borrowing. The latest ceiling of $16.4 trillion was reached in January.
Rather than deal with out-of-control spending, politicians of both parties agreed to suspend the debt ceiling, meaning that there will be no limit on what the federal government can spend and borrow through May 18. On May 19, the debt ceiling will be raised to the total amount of debt outstanding as of that date, and as a consequence, at that time the debt limit must again be considered to enable more borrowing to fund what is likely to be another year in which the deficit exceeds $1 trillion. I fully expect that that this scheme will repeatedly be used to avoid facing any limit.
This mechanism eerily parallels a step taken by President Nixon in August 1971. Rather than address the financial imbalances the US government faced, he chose – in his words – to “suspend temporarily” the US dollar's constitutional link to gold. His “temporary” suspension has now lasted 42 years. This observation brings up an important point.
This current suspension of the debt ceiling is not going to be temporary. From now on, each time it comes up for consideration, I expect that the politicians will just keep extending the suspension again and again. They will always take the soft political option, just like the politicians did in the German, Serbian and Zimbabwean hyperinflations.
The debt ceiling was never much of a limit because it has been raised dozens of times over the years, but it did serve one purpose. It highlighted the lack of political will to get spending under control. Importantly, the dire financial condition of the federal government became apparent each time the ceiling was hit. The last time it was reached, the US lost its Triple-A credit rating.
Out of control spending by a government is always the cause of hyperinflation. The debt ceiling had been the last remaining roadblock to unlimited federal government spending. By suspending the debt ceiling, the US government has given itself a blank cheque, taking one giant leap down the road leading to the hyperinflation of the US dollar.