Jack Dorsey is worried about ‘hyperinflation’ — these experts say you shouldn’t be that scared

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Twitter and Square CEO Jack Dorsey recently issued a dire economic prediction, complete with a frightening phrase: hyperinflation.

“Hyperinflation is going to change everything. It’s happening,” Dorsey tweeted on Oct. 22. Later, in response to a follower’s follow-up question, Dorsey added that “[hyperinflation] will happen in the U.S. soon, and so the world.”

Such an ominous proclamation begs questions like: “What is hyperinflation?” and “Could it really happen in the U.S. ‘soon’ or at all?”

The extreme rarity of hyperinflation

Hyperinflation is a term economists use to describe a period of extremely high inflation, which measures the rate of rising prices for goods and services. Typically, an economy has to see an inflation rate of greater than 50% for at least a month before economists use the hyperinflation label.

Periods of hyperinflation are actually extremely uncommon, according to Steve H. Hanke, a professor of applied economics at Johns Hopkins University and an expert in the area of hyperinflation. 

“Hyperinflations are rare birds. By my count, there have only been 62 episodes of hyperinflation in world history, and none have occurred in the United States,” Hanke tells CNBC Make It. 

Hanke — who closely studied previous cases of hyperinflation, including a case in Zimbabwe more than a decade ago that was caused by excessive government spending and a failing economy — has called Dorsey’s hyperinflation predictions “unfounded.”

For context, the Labor Department’s consumer price index (CPI), which is a commonly used measure for inflation, has increased by 5.4% over the past 12 months. That’s the highest annual rate increase in the U.S. since 2008, but it’s still far below the threshold for hyperinflation.

“Words and their definitions are very important, and the word ‘hyperinflation’ comes with a very precise definition,” Hanke says. 

The highest U.S. inflation rate of the past century came in the period just after World War II, when inflation jumped by nearly 20% in 1947 amid post-war supply shortages.

How cryptocurrency could play into Dorsey’s warning

As CNBC previously noted, Dorsey is a well-known advocate for cryptocurrency, namely bitcoin. Square also owns some bitcoin, and has tentative plans to mine the cryptocurrency.

Extended periods of hyperinflation can cause entire currencies to collapse, which suggests that Dorsey’s prediction could be a subtle plug for investing in cryptocurrencies as a hedge against massive inflation. Investors like billionaire Paul Tudor Jones have also touted cryptocurrency for the same reason.

“I think people who are worried about inflation use that as a reason to justify going into bitcoin,” Atay Goldstein, a professor of economics and finance at the University of Pennsylvania’s Wharton School, tells CNBC Make It. 

Advocates for cryptocurrencies like bitcoin say that they are less subject to devaluation from inflation because of their limited supply, Goldstein notes, though skeptics suggest bitcoin could still be vulnerable in a period of high inflation.

Whatever his motivation, Dorsey isn’t the only one making dire hyperinflation predictions. Some of that speculation has come in the form of rampant internet rumors that the U.S. Federal Reserve is printing too much money through the central bank’s monetary policies, which could lead to devalued U.S. currency and price hikes for consumers.

Last year, billionaire Paul Singer, the founder of hedge fund Elliott Management, wrote in a letter to investors that the monetary policies the Fed adopted during the Covid-19 pandemic could lead to a period of hyperinflation “lurking just out of sight.”

Why experts say Dorsey’s claims are ‘totally ridiculous’

Most economists, however, have dismissed this talk as overly dramatic. David Rosenberg, an economist and president of Rosenberg Research, told CNBC’s “Trading Nation” this week that the trend of rising prices in the U.S. is simply due to supply chain issues brought on by the ongoing pandemic. The idea that the current rate of inflation could grow to the point of hyperinflation, bringing down the U.S. economy, is “totally ridiculous,” he said.

Similarly, tech investor Cathie Wood, founder and CEO of investment management firm Ark Invest, also rebutted Dorsey’s hyperinflation fears this week. In a tweet on Monday, Wood wrote that she wrongly predicted runaway inflation in 2008, as a result of the Fed’s monetary policies aimed at overcoming the financial crisis.

Now, Wood is predicting a period of deflation in the near future, as a result of tech innovation and prices falling once wrinkles in the supply chain are ironed out.

Over the summer, Federal Reserve chairman Jerome Powell said that the period of elevated inflation in the U.S. would be “transitory,” or short-lived. However, Powell said last week that “supply constraints and elevated inflation are likely to last longer than previously expected and well into next year.”

Goldstein admits there’s at least some possibility that higher inflation could last longer than 2022. But he still counts himself among the economists who are optimistic that the inflationary period we’re experiencing is “more likely to be transitory than persistent.”

That’s especially because the economy is still recovering from “an unusual period,” he says, referring to the pandemic and supply chain issues. He’s confident, he says, that lawmakers and monetary policymakers at the Fed will take the appropriate steps to rein in inflation, including tapering asset purchases and raising interest rates.

Hanke is less optimistic. He recently wrote in The Wall Street Journal that he expects U.S. inflation between 5% and 6% in 2022, and that the elevated inflation rate will persist for two to three years. 

But in a further rebuttal of Dorsey’s prediction, Hanke also wrote on Twitter on Tuesday that his prediction for inflation is still “nowhere near the annual rate required to qualify for hyperinflation.”

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