Let's get one thing clear from the get-go: Hyperinflation is an extreme occurrence.

In the worst-case scenario of hyperinflation, a country's currency is rendered worthless; a trillion dollars wouldn't buy you a Coke. Uber-reporter Michael Lewis wrote an eye-opening account of the kinds of things he saw while visiting recent hyperinflation victim Iceland: an epidemic of people blowing up their Range Rovers for insurance money, hoarding food and foreign currency, and seriously contemplating emigrating from the country.

Stepping back from that dire possibility, a more conservative definition of hyperinflation is a doubling of prices over three years. For the century or so we've been keeping track, the U.S. hasn't come close.

In fact, we're spoiled, because we haven't seen a year with double-digit annual inflation in the last 25 years. However, we did experience it in the 1910s, the 1920s, the 1940s, the 1970s, and the early 1980s.

Just because hyperinflation hasn't happened recently doesn't mean it won't. But inflation of the triple-digit variety is a doomsday case that would require a massive devaluation of the U.S. dollar, and a weakening of the U.S. economy, on a scale much larger than even what we're seeing now. In short, the world would have to completely distrust the U.S.' future earning power for hyperinflation to occur.

That happened to Iceland. But remember that Iceland was a small fishing country (population: roughly 300,000) that morphed into an international banking hub overnight. The U.S. banking problems are bad, but we have the rest of our income-producing industries to fall back on. While hyperinflation in the U.S. is possible, it's just not very likely.

Scary possibilities
So let's focus on two concerns that have a much greater likelihood: a return to double-digit inflation, and a return to that hallmark of the Great Depression, deflation.

Is it rational to be concerned about both inflation and deflation? Absolutely.

We should certainly worry about deflation. When one of our nation's primary asset classes (housing) is coming down from a historic bubble, there's tremendous deflationary pressure put on the economy, and prices rapidly decline. That's bad, because once deflation starts, it's in everyone's interest to slow spending -- a dollar today is worth less than a dollar tomorrow. When everyone slows their spending, the economy comes grinding to a halt, ensuring that people don't have the money to spend, even if they wanted to.

This is exactly what happened during the Great Depression. We experienced annual deflation of 2.3%, 9%, 9.9%, and 5.1% from 1930 to 1933. The economy was in shambles. Real GDP plummeted (it fell 13% in 1932 alone) and at one point, unemployment reached one-fourth of the population. Yes, 25% of all Americans were out of work. Families split up to scour the country looking for jobs, shantytowns sprouted, and we feared hunger as much as fear itself. It's about as close as this country has come to an economic Armageddon.

Ben Bernanke: arch-nemesis of deflation
Of course, Fed Chairman Ben Bernanke knows this. He's studied the Great Depression, and despite his recent posturing, he clearly manages the economy by trying desperately to avoid a deflationary spiral. This is why he's reduced the government interest rates to virtually zero. It's why he's printing money by the trillions, despite its limited effectiveness in spurring banks to lend.

Assuming these government actions work, double-digit inflation will be the more likely result. All the moves the government is making to forestall deflation are by definition inflationary. The excess money in the economy, the low interest rates, and the tremendous increase in the national debt can all combine to devalue the American dollar and pump up inflation.

Who wins with inflation?
If inflation does hit, that's great news for borrowers. And terrible news for lenders (sorry again, banks). In a high-inflation scenario, the price of everything generally goes up. Your food and gas prices increase, but eventually, so do your wages. However, if you're a borrower, the amount of principal on the debt you owe stays the same. Only now, you can pay it back with inflated currency. Hence, borrowers profit at the expense of lenders.

Companies that have outstanding debt and the ability to survive to pay off that debt can find themselves in a very nice position. Here are some examples:

Company

Debt/Capital

Interest Coverage
Multiple

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)

26.1%

23.8

Philip Morris International

69.6%

16.7

Vale (NYSE: VALE)

30.2%

11.7

Caterpillar (NYSE: CAT)

84.6% Continued...