Tag Archives: hyperinflation

Let’s learn about hyperinflation. Who knows what the future holds for us?

Summary:  What makes an experiment is uncertainty about the outcome, no matter how great people’s confidence. That applies to the great monetary experiments now in progress by China, Europe, America, and Japan. Europe since 2008, the USA since 1998, and Japan since 1988 all have common histories: confident leadership, unexpected crises, and repeatedly wrong forecasts.

After all that it will astonish historians how we worship the power of central bankers. But that power neither makes them omnipotent, nor their theories accurate. Today’s post by Nathan Lewis discusses one of the possible outcomes.

“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

Today’s guest post:

What is “Hyperinflation”?
By Nathan Lewis at New World Economics, 13 October 2013
Reposted with his generous permission

Bernanke Green Lantern

Contents

  1. A history of hyperinflation
  2. Hyperinflation: not what you might think
  3. What hyperinflation looks like
  4. USA in the 1970s; Mexico in the 1980s
  5. Other lesser-known episodes
  6. Why not us? Or rather, why not us yet?
  7. About the author
  8. For More Information
  9. A Last Resort, if all else fails …

(1) A history of hyperinflation

The word is tossed around, and many have an opinion about it, without having any real clear idea of what it means.

We all probably have some mental picture of the “billion dollar banknote” or “price of coffee rises as you drink it” kind of hyperinflation, as happened in Germany especially in 1923.

Children - 1923 Germany

Children learning to manage money, Germany 1923

But, this is somewhat rare. Not as rare as you might think, but it constitutes only a small portion of those events which I think are legitimately labeled “hyperinflation.” This table lists fifty-three of the most intense hyperinflations in recent history:  The Hanke-Krus Hyperinflation Table.

The least intense hyperinflation listed on this table is a 55.5% increase in “prices” in a month in Kazakhstan in 1993, which works out to a doubling of prices every 47.8 days. However, this table leaves out many hundreds of events which are legitimately called “hyperinflation” in my opinion, and in the opinion of those who lived through them, and historians.

You see what I mean when I say that it is “not as rare as you might think.” Here’s Wikipedia on various hyperinflations.

(2) Hyperinflation: not what you might think

Extreme hyperinflations like these tend to grab people’s attention. However, I would suggest that they are actually less relevant than some milder cases.

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Lessons from the failed forecasts of inflation since the crash

Summary: How we handle our fears shows much about ourselves, our ability to see and think. Such as fear of inflation, a major obsession of Right since the crash. Here we look at the warning, see what actually followed, and briefly review the basis of these fears.

Inflation

Contents

  1. The inflationistas’ story
  2. What inflation?
  3. Warning: velocity
  4. A scary lesson from the past: the Weimar inflation
  5. Measuring inflation
  6. For More Information
  7. Giving Conservatives the last word

(1) The inflationistas’ story

Few things pay as easily and well as feeding people’s fears (not nearly as much work as raising food to feed people’s bellies). It’s a simple process: tell a story that validates people’s political beliefs and gives a simple account of complex phenomena (otherwise people will see the con).  Forecasts of hyperinflation do both quite well.

  • Slamming those that conservatives don’t like: Obama and the Federal Research
  • Slamming policies that your wealthy backers don’t like: anything that risks inflation (creditors love mild deflation, like that during the Gilded Age).
  • Telling a simple story about the mind-bendingly complex dynamics of money.

During the past five years many people have ridden this horse. Let’s look at one example. Red emphasis added.

(a) HYPERINFLATION SPECIAL REPORT“, Issue Number 41 by John Williams’ Shadow Government Statistics, 8 April 2008 — Excerpt:

  • Inflationary Recession Is in Place
  • Banking Solvency Crisis Has Opened First Phase of Monetary Inflation
  • Hyperinflationary Depression Remains Likely As Early As 2010

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. … The U.S. has no way of avoiding a financial Armageddon.

(b) HYPERINFLATION SPECIAL REPORT“, Commentary Number 263 by John Williams’ Shadow Government Statistics, 2 December 2009 — Excerpt:

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What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!

Summary:  Although one of the most power agencies of the US government, obsessively discussed in the financial news, it remains one of the least well understood. Here we examine the limitations on its power.  Readers can decide for themselves if these limitations are too tight, or too loose.

Chapters in this series about Central Banks, giants of State power:

From The Independent Word

  1. Limits on the Fed’s power
  2. About QE3 and the power of Expectations
  3. The Fed as our national Shaman

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Contents of this post

  1. Power of Central Banks
  2. Inflation
  3. Hyperinflation, the quick killer
  4. Deflation, the quiet killer
  5. Legitimacy — the ultimate limit
  6. For More Information

(1)  The power of central banks

The development of central banking in the century before WWI was one of the last few innovations necessary to produce the nearly omnipotent  modern State.  Central banks provided the mechanism to not only easily finance large projects, such as wars and great societies, but also harness large banks to the State’s needs (for their mutual gain).

The ability to print money, set interest rates, and harness banks’ power to lend gives the illusion of omnipotence. But life means limits.  Central banks have both hard boundaries to their abilities — and a hidden weakness.

Central banks have well known limits to their powers of monetary stimulus, no matter how exercised.

Posts about the Federal Reserve:

(2) Inflation

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
— Milton Friedman, The Counter-Revolution in Monetary Theory (1970)

Central banks can stop and start inflation by controlling the nation’s money supply.  Stopping inflation requires painful measures, but with the certainty of success.  Starting and managing useful inflation requires more skill.

Why create inflation?  Unanticipated inflation acts as the magic sauce of monetary policy. Quiet, mild, relentless. It lowers the real interest rates. If we also have wage growth slightly above inflation, then our crushing debts evaporate painlessly (as we erased aprox 1/3 of our WWII debt). Bernanke literally wrote the book on this, Inflation Targeting (1998).

There are two limits to central bank’s ability to manage inflation.  First, the nation’s currency.  The central bank can expand the money supply without limit — with effects varying depending on its internal circumstances. But it will depress the value of the currency.  A weak currency can boost exports, beneficial if not offset by the increased cost of exports (eg, China and Germany have done this successfully). At some point, however, a currency collapse comes — with horrific consequences.

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Inflation is coming! Or so we’re told. Instead look at the evidence.

Summary:  Not a day goes by that investment or political (conservative) writers don’t assure us that inflation is coming to the US — or even here.  Except when they’re warning of hyperinflation (for the right-wing its always Weimer-inflation, except when it’s NAZI-Munich).  This post shows the evidence that they’re wrong, and a possible source of this hysteria.

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Contents

  1. Warning signs of inflation?  No.
  2. There are signs of deflation.
  3. In fact we have low inflation
  4. What about rising food prices?
  5. The Boomers’ secret lust for inflation
  6. For more information about inflation

(1)  Warning signs of inflation?  No.

Monetary inflation from the Fed printing money!  Look at the line on that graph skyrocket!  Or not.  The slight increase since November results from QE2.

Monetary inflation show by the rapid increase in the US money supply!  Look at the line on that graph skyrocket!  Or not.  The YoY increase in M2 is 4.3%, roughly the increase in nominal GDP (the money supply should increase along with GDP).

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Can Obama turn America into something like Zimbabwe?

Summary:  Can Obama make America like Zimbabwe?  Or is this widespread warning a sign that we’ve become gullible fools?  The easy acceptance of this preposterous warning suggests the latter.  It’s sad that such a post is necessary.  Worse, explaining these facts is unlikely to change the mind of many people believing this nonsense.  This is a follow-up to Would a default by the US government help America?, and another in a series looking at the important role of propaganda in modern American politics.

Conservatives have warned that President Obama is wrecking America, perhaps deliberately. The early comparisons were mild.

“What you’re doing is buying into the notion that if we just print some more money that we don’t have and send it to different states, we’ll create jobs,” he said. “If that’s the case, why isn’t Zimbabwe a rich place?”
— Mark Sanford (R, Governor of S. Carolina), CNN, 11 March 2009

In the past year they’ve become explicit.

“Bruce, I’m not trying to turn the United States into Zimbabwe. That would be the guy in the White House, whom you seem surprisingly anxious to defend.”
— Glenn Reynolds (Law Professor at U of Tennessee), Instapundit, 19 February 2010 — Red emphasis added.

Update: Prof Reynolds was circulating the GOP narrative.  For a more explicit statement, here is Peter Schiff on Glenn Beck’s Fox News show, 28 December 2009 (transcript here):

SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.

PAYNE: And what does that mean? For people watching this show, what does that mean for the average American?

SCHIFF: It means their life is going to get a lot more difficult. It means things that they need to buy, things like food and energy, are going to be much more expensive. Ultimately, interest rates are going to rise and their entire standard of living is going to plunge. And I’m hoping the government doesn’t respond to this inflation with price controls because that’s going to make it even worse. Now, you’re going to be waiting in long lines to get basic food items or to get energy because there’s going to be shortages. People might be going to the black market.

PAYNE: You’re talking you’re talking Zimbabwe, Weimar, Germany — I mean, you’re really talking about something like that actually happening in this country.

SCHIFF: It will happen if we don’t change policies. There is still time to change. … I mean, I’m running for the United States Senate, so I can try to change that myself. But if we don’t reverse course, if we continue to stimulate, then we will end up with hyperinflation and it will be like Zimbabwe.

That intelligent and educated people make this comparison — either sincerely or as agitprop — shows the sad condition of political debate in the US.   By comparison with this “Tippecanoe and Tyler too” (Wikipedia) looks like The Federalist Papers.  This fear of becoming like Zimbabwe has taken root among conservatives, frequently appearing in comments on this website and others.  For one sample see this Google search.

Let’s count the ways this comparison fails.

  1. Obama’s economic policies closely follow those of President Bush.
  2. The expansion of the money supply took place under President Bush; it’s been flat under Obama.
  3. Conventional economic theory says that expanding the money supply during a depressionary shock is the correct action.
  4. There are no significant similarities between Zimbabwe and the USA.
  5. There are no significant policy similarities between Zimbabwe and the USA.

Below you’ll see a brief analysis of each point.  Anyone making this comparison needs to read this:  Where to go to learn about economics, and help you understand what’s happening to America and the world.

Update:  As noted in the comments, this comparison serves to incite fear much as the equally absurd Bush=Hitler did among liberals.

(1)  Obama’s economic policies closely follow those of President Bush.

The recession started in December 2007.    In response the Bush Administration and Congress passed…

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Would a default by the US government help America?

Question for the Day

“Would a default on Treasuries accomplish what the Balanced Budget Amendment was supposed to achieve, by forcing the government to spend no more than it takes in?  With more collateral damage, of course. . . .”
— Glenn Reynolds (The Instapundit, Law Professor at U of Tennessee), source.

Contents

  1. The short answer
  2. Default comes in many forms
  3. Focus on the favorites:  inflation and devaluation
  4. Two examples of successful default
  5. Conclusion
  6. Other articles about this topic
  7. Reactions to Reynold’s question
  8. For more information on the FM website, and an Afterword

(1)  The short answer

A default on a loan occurs when the borrower does not make required payments on in some other way does not comply with the terms of a loan.  The hysterical answers to Reynolds are wrong, since default is a commonplace of history (sometimes successful, sometimes not).  It’s a perfectly legitimate question, the type a skilled lawyer asks his client.  We will need to make difficult choices to get America back on track, and clear evaluation of all options is essential.  Here is the short answer, in pieces.

  1. Yes, the budget would be balanced since there would be no more borrowing until the US re-established its credit.  But default does not fix the underlying problems causing the borrowing, which is why so many people and nations become serial defaulters.  Philip II the Spain defaulted several times, despite Spain’s riches stolen from the western hemisphere.  Today we have Greece and Costa Rica.
  2. Nations seldom default solely due to large debts. since debts can usually be managed.  To rephrase Milton Friedman, default (and its handmaiden, hyperinflation) are everywhere and always a fiscal phenomenon.  Nations default when they are running massive deficits and can no longer borrow.
  3. The costs of default cannot be reliably forecast, but would probably range from massive to catastrophic.  Government bonds are the foundation assets for domestic financial institutions.  Such as banks, insurance companies, and pension plans.  A default solves one problem and creates a thousand more.  Which is why nations default only as a last resort. 
  4. Why default when the government can just print money (aka monetize the deficit)?  Inflation probably has fewer side-effects than default, and we have much experience with inflation.
  5. Default on treasuries would eliminate our debt, now $7.9 trillion (from past spending).  The government’s liabilities (debt plus promises to spend) are far larger, in excess of $70 trillion.  See here for details.
  6. Emerging nations have different economic dynamics than developed ones.  Situations differ even among developed nations.  The calculus of default differs greatly in Greece and the USA.  This considers only America.
  7. This is a brief sketch of a complex subject.  See the links at the end for more information.

While this answer’s Reynold’s precisely worded question, it does not answer broader question posed in the title.  I briefly discuss this in the conclusion, but a full analysis requires several thousand more words.  So it must await another day.

(2)  Default comes in many forms

Governments default on their debt so frequently that have developed a thousand ways to do so, beyond just refusing to pay.  Just like in the song…

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