Would a solar flare that wipes out all of the worlds financial data cause hyperinflation or hyperdeflation of the remaining physical currency?

Question

According to New Scientist, a tech-destroying solar flare could hit Earth within 100 years. It could knock out our electrical grids, satellite communications, and the internet. It might also erase data that is stored on financial servers such as bank account balances.

Let's imagine something like that would happen, and all of the world's financial data would be erased. Nobody knows who owns what anymore. All of the world's account balances and stock/bond portfolios are completely nullified due to the effect of the solar flare.

In this case, only the physical currency (coins and bank notes) that is currently in circulation remains. How would a solar flare event like the one described above affect the value of this remaining currency? On the one hand, it is imaginable that rapid deflation would occur because the total money supply would suddenly be greatly diminished. After all, 92% of the worlds currency currently exists in a digital form. So that would mean that 92% of all the money would simply vanish.

On the other hand, I can also imagine rapid hyperinflation would occur. Most if not all of the world's currencies is fiat money. Which means its not backed by gold or silver but purely based on trust. I can imagine people would also lose trust in the value of the currency if most of it suddenly disappears.

So what would be more plausible? Hyperinflation or hyperdeflation.

Answer 1

As a general rule, scarcity increases value. Given that 8% of the world's currency (the portion that was actually in physical form, be it aluminum coins that look and feel more like bus tokens or paper or plastic notes) now has to do the job once done by 100%, it seems reasonable to believe that a dollar bill (or Euro note) will very soon be worth more (in terms of what it will bring) than it was before -- assuming anyone sees it as having any value at all.

David Brin's The Postman looks at this as a very minor subplot. The protagonist, who steps into the role of a USPS mail carrier, begins to accept only actual US dollar bills. Not coins (dollar denominated or otherwise), not larger bill, only singles. By the time he's been carrying the mail for a couple years, those tattered old singles have become the core of a new economy, because they represent value -- one of them will see a letter delivered anywhere in the Postman's district, or passed off to another carrier when/if he meets one going the right direction.

And that's all it takes -- establish a value for something with sufficient rarity and difficult of counterfeiting, and that thing is money, whether it was money last week or last year, or not.

Answer 2

Neither

Money (or anything acting as money) only has value if it can be spent to acquire desired things, or kept to acquire things in future, and if sufficient others agree by their actions that it has that function for them, too.

If the computer systems with financial data died, as the question says, then money simply won't have value. Think about it. You run a business, and suddenly your entire supply chain fails, you have 1000 suppliers here and indistant places but no way to pay any of them (can't pay remotely, no usable bank accounts exist for anyone, exchange rates unknowable, and do you have 200,000 $1 bills for that item.needed for production?) Your staff have just lost their savings, theres chaos on every street. In a total loss of confidence in the financial system, nobody actually trusts the bills you wave round, anyway.

Or, put another way.....

Everyone suddenly owns precisely what they physically have in their pockets and homes at the time, nothing more.

The outcome isn't deflation or inflation. Its a kind of chaos in which money as was, becomes irrelevant. Something may take its place, but that won't be the fiat currency and therefore inflation/deflation won't be applicable terms.

Answer 3

Computers wouldn't be impacted a lot.

Data centers tend to be grounded, and power generation systems often have protections nowadays. In addition, we monitor the sun more, so people can protect stuff during dangerous times. Don't worry, banks are keeping your financial records safe. The electricity grid might be damaged by a powerful enough set of solar flares and CMEs, especially older parts with weaker protections but the data centers containing all your debt would be fine.

They could just fix them up and send the debt collectors to collect more debt from people.

Answer 4

First: I imagine that most datacenters, mainframes, and hard drives would be less affected than you present - for various reasons that aren't probably interesting/relevant to your worldbuilding premise.
That's just one IT person's opinion. Remember that the New Scientist article has to be compelling, and leaning towards doom and gloom - makes people talk about it more.

But this is worldbuilding SE - do it your way!

Back to your question - it certainly would be a catastrophe.

So what would be more plausible? Hyperinflation or hyperdeflation.

Hyperinflation
Physical money would be of little value initially - at least within most of the USA, and probably most large cities in the world.
Few people have more than a couple days of food in their homes - and it is worse in places like New York City where the apartments don't even have full sized appliances nor any place for food storage.
Fiat currency or metal backed... doesn't matter in the short term.
People who aren't farmers or "preppers" would be willing to part with most of what they had to get food to live - that's inflation!

And remember, if your power grid is down - no refrigeration!
Think about the amount of food you have in your house right now.
Anything in your refrigerator will be bad tomorrow, unless you put it in the freezer - but even then you only get one more day.
How long before you're willing to trade all the money you have to get a jerky treat for your child? (or any food that doesn't require refrigeration)

The computers within cars and trucks would likely be fried if the vehicle weren't in a garage of some kind (home garage, carport, parking garage below the top level, etc.)
With enough of them immobilized, there's plenty of fuel in gas stations for a while - but there's no supply chain left because even if you have enough vehicles, and clear enough roadways to drive them on, your communications are knocked out long enough for the whole thing to fall apart. It's rather interdependent.
So... hyperdeflation for vehicles.

Depending on your target audience and genre, you may want to look into real life instances of people within countries experiencing hyperinflation going to the border of a neighboring country to 'traffic' themselves and their children for food. Only do this if you have a strong stomach.

Answer 5

The destruction of large amounts of money, in the long run, would cause a general reduction in the price level (and therefore, deflation).

If you take a quantity theory of money view of the world:

$$ PY = MV $$

$P$ is the price level, $Y$ is real output, $M$ is the money stock, and $V$ is monetary velocity, the massive reduction in $M$ would – holding $Y$ and $V$ constant – force $P$ into a proportional reduction.

The specific size of the reduction in the money supply would be substantial. Eg for the US, the amount of US currency (that is, Federal Reserve notes and coins) in circulation in Nov 2021 is 2 114.6 billion. At the same time, the M1 money supply ('money' including money in chequing and savings accounts) 20 345 billion. That's about 90 per cent of the M1 money supply gone.

In general equilibrium, that sort of destruction would have a large effect on real output and velocity as well. One could expect a reduction in velocity as money becomes more difficult to exchange, along with disruptions across the financial system, which would massively reduce output in the medium run. You would have to model the impacts of that for a more precise answer.

Answer 6

I would say hyper-inflation, although in a very roundabout way. Everything we have is going to lose all value except for gold and silver.

Why? We protect our data. Sure, there's data sitting in unprotected harddrives that are going to get wiped, but there are backups on varied media in underground bunkers in case something goes wrong.

So if all of those get hit, that solar flare was... bad. Very bad. All of our cars are going to stop working. Supply chains will grind to a halt. Governments which depend on the rapid communication afforded by computers will collapse. This is not an "end of finance" event. This is an end of civilization.

So this is why I say hyper-inflation. Everything supported by civilization is going to fall apart. All fiat currency is in this bucket. All that will be left are the currencies that have stood the test of time over thousands of years: gold and silver. And it would be hard to say if they would hold value or not. The available basket of merchandise with which to measure inflation is going to change rather dramatically and start focusing on food water and shelter rather quickly.