Ludwig von Mises - How long can a central bank continue an inflation?

How long can a central bank continue an inflation? Probably as long as people are convinced that the government, sooner or later, but certainly not too late, will stop printing money and thereby stop decreasing the value of each unit of money. When people no longer believe this, when they realize that the government will go on and on without any intention of stopping, then they begin to understand that prices tomorrow will be higher than they are today. Then they begin buying at any price, causing prices to go up to such heights that the monetary system breaks down.

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Our take on this quote:

The tipping point of inflation: when confidence is lost

Ludwig von Mises, a leading figure of the Austrian School of Economics, warned of the psychological nature of inflation and the moment when it spirals out of control. Inflation doesn’t just depend on monetary expansion; it is sustained by public confidence. As long as people believe that inflation is temporary and will eventually be controlled, they tolerate rising prices. But once they realize that inflation will continue unchecked, they rush to spend their money as fast as possible, triggering a runaway price surge that leads to monetary collapse.

In this article, we will break down Mises’ quote, examine real-world examples, and discuss key lessons for investors, politicians, and anyone concerned with preserving financial stability.

Breaking down the quote

Mises highlights an important but often overlooked aspect of inflation: it is as much a psychological phenomenon as it is a monetary one.

1. Inflation is sustainable - until it's not

   • Governments and central banks can print money without immediate consequences as long as people believe that inflation will eventually be controlled. The moment this belief is lost, inflation accelerates uncontrollably.
      

2. The psychological shift: from concern to Ppanic

   • As inflation rises, people first adjust their behavior by saving less and spending more. However, when they realize inflation is permanent, they stop thinking about savings altogether and start buying anything tangible, causing prices to skyrocket.
      

3. The final stage: monetary breakdown

   • This phase is known as hyperinflation. At this point, money rapidly loses its function as a store of value, leading to its rejection in favor of alternative currencies, barter systems, or hard assets.
      

Mises' insight warns that inflation is not just about economic policy—it is about maintaining confidence. Once trust in the currency is lost, the system collapses rapidly.

Real-world examples of hyperinflation and currency collapse

1. The Weimar Republic (Germany, 1921-1923)

• What happened?
  After World War I, Germany printed excessive amounts of money to pay war reparations. For a while, inflation was tolerated. But when people realized that money printing would never stop, they rushed to spend it before it lost more value. Prices soared daily, and by late 1923, a loaf of bread cost 200 billion marks. The monetary system collapsed.

• Lesson learned:
  Inflation is a slow poison - until it suddenly becomes an unstoppable force.

2. Zimbabwe (2000s)

• What happened?
  Zimbabwe’s government printed vast amounts of money to cover budget deficits. At first, inflation was gradual, but as confidence in the currency faded, hyperinflation took hold. By 2008, inflation hit 89.7 sextillion percent per month. Zimbabweans abandoned the local currency in favor of U.S. dollars and gold.

• Lesson learned:
  People will always seek an alternative when their national currency fails.

3. Venezuela (2010s)

• What happened?
  The Venezuelan government engaged in reckless money printing, leading to hyperinflation exceeding 1,000,000% per year. When citizens realized the bolivar would keep losing value, they switched to cryptocurrencies, barter, and foreign cash.

• Lesson learned:
  Trust in money is fragile - once it’s gone, it’s nearly impossible to restore.

These cases confirm Mises’ warning: inflation is tolerable only as long as people believe it will stop. Once confidence breaks, hyperinflation destroys the monetary system.

Lessons for Investors

Mises’ insight is crucial for investors looking to protect their wealth in inflationary environments.

1. Avoid holding too much cash

   • Inflation erodes purchasing power, and hyperinflation can make cash worthless overnight.
      

2. Invest in hard assets

   • Gold, real estate, and Bitcoin serve as strong hedges against fiat currency devaluation.
      

3. Diversify across currencies

   • Holding multiple currencies or foreign investments can reduce exposure to local inflation.
      

4. Watch for psychological shifts

   • Inflation’s tipping point happens when public confidence breaks. Smart investors anticipate this moment and act accordingly.
      

Implications for politicians

Mises' warning also carries critical lessons for policymakers.

1. Inflationary policies are a short-term illusion

   • Printing money may provide temporary relief, but the long-term consequence is economic disaster.
      

2. Public trust must be maintained

   • The most dangerous moment is when people no longer believe inflation will be controlled. Once confidence is lost, economic collapse is inevitable.
      

3. Austerity and monetary discipline are necessary

   • To prevent hyperinflation, governments must reduce deficits, limit money supply growth, and maintain fiscal responsibility.
      

4. Central banks cannot always fix the problem

   • The idea that central banks can always "manage" inflation is false. If credibility is lost, no amount of interest rate hikes can restore it.
      

Governments that ignore these lessons do so at their own peril.

Key Takeaways

Mises’ warning about inflation is more relevant than ever. Here are the key lessons:

1. Inflation is sustainable only while confidence remains

   • People tolerate rising prices if they believe inflation will eventually be controlled.
      

2. Once trust is lost, hyperinflation is unavoidable

   • When people realize that inflation will continue indefinitely, they panic-buy, accelerating the destruction of the currency.
      

3. History repeats itself

   • Germany, Zimbabwe, and Venezuela all followed the same pattern—initial government denial, gradual inflation, loss of confidence, then total collapse.
      

4. Investors must protect themselves

   • Holding assets outside fiat money - such as gold, Bitcoin, and real estate - is critical for financial security.
      

5. Politicians must learn that printing money has limits

   • Once inflation spirals out of control, restoring trust in the currency is nearly impossible.
      

Final Thoughts

Ludwig von Mises' insight into inflation is not just an economic observation - it is a warning backed by history. Inflation, when not controlled, leads to a psychological tipping point where people lose trust in money itself. When that happens, hyperinflation becomes inevitable, and the currency collapses.

For investors, the lesson is clear: do not rely on fiat money alone. Holding hard assets, diversifying, and staying ahead of inflation trends are crucial.

For policymakers, the warning is dire: inflationary policies are a road to ruin. Once the public loses faith, no amount of intervention can stop the breakdown of the monetary system.

Mises was right then, and his warning is just as relevant today. The question is: will the world listen before it’s too late?

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