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 lesson from the past: Weimar.
  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. Next in a series about Central Banks, the giants of State power.

From The Independent Word

Contents

  1. The 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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