Might Greece see some version of hyperinflation?

Keep in mind that things can go badly under either a yes or no vote today.  (I am not even sure the referendum result will make such a difference, since it is all in the subsequent deal, or lack thereof, and the terms would be different anyway.)  Yet I do not think a hyperinflation is the likely result.

As things stand, Greece could run out of euros in well under a week.  That is a deflationary pressure.  To be sure, Greek companies are already starting to print up various kinds of scrip.  But those will be media of exchange priced in terms of euros, not new media of account.  The script will to some extent stabilize against deflationary pressures, by preventing a total economic collapse, but they won’t themselves cause hyperinflation.  If one company prints up too much scrip, the value of that brand will fall in terms of euros.  In contrast, a “domestic” medium of account is usually firmly entrenched in a classic hyperinflation.

Greece may eventually move away from the euro as a medium of account, but that likely would happen only once an alternative payment medium — perhaps the new drachma — is relatively stable in value.  Again, there is no expected hyperinflation.  Deposit confiscation will be required long before hyperinflation is an option, do note that is not exactly a reassuring thought.  In fact hyperinflation is too slow and inefficient a way to steal from the citizenry in this setting.

An interesting set of issues revolves around bill prepayment.  If you didn’t know, electronic transfers within the country are still allowed, so everyone is trying to prepay bills rather than receive a haircut on their deposits (see the link above).  Various events could speed up or slow down these pressures, for instance greater stability combined with outside aid could limit deposit confiscation risk and thus lower bank deposit velocity.  Alternatively, greater risk could cut either way.  It could lead to more prepayment and higher velocity, but it also could induce suppliers to take actions to make prepayment harder.  There are some complex options here, though still I don’t see them giving rise to a hyperinflation.  Again, the key point is that even under Grexit scenarios the euro remains a medium of account for a while still, and deflationary deposit confiscation will be needed before hyperinflation could extract enough seigniorage.

As Frances Coppola points out, Grexit is a process not an event and many of the early and indeed intermediate steps already are underway.


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