The claims of hyperinflation awaiting the U.S. or the U.K. seem hyperbole at best, misinformation and deception at worst. Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. [Let me explain more fully.]
[The original article, as written by Edward Harrison (CreditWriteDowns.com), is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) in a slightly edited ([ ]) and/or abridged (…) format to provide a fast and easy read.]
What is Hyperinflation
Hyperinflation is the economic apocalypse many doomsayers pose as the logical end to the world’s experiment with fiat money…
Rob Parenteau of the Richebacher Letter wrote to clients about Weimar, one of the worst episodes of hyperinflation:
“Hyperinflation episodes are characterized by rapidly accelerating inflation, a collapsing foreign exchange rate and, eventually, a widespread disorientation and disruption of productive activity. Keynes, writing in 1919, well before the terminal stages of the Weimar hyperinflation had been revealed, characterized the nature of the mayhem involved in such episodes as follows:
“As the inflation proceeds, and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”
Is this what awaits the U.S. or the U.K.?…Let’s attack the question using Zimbabwe and Weimar Germany as examples. These are the two most extreme cases of hyperinflation that economic historians have ever witnessed. They are instructive in regards to what causes hyperinflation and what does not.
Weimar Germany 1919-1923
After World War I, every nation which fought was broke because of the war’s cost. No country had enough gold assets to repay the billions of dollars they owed and this was a multilateral problem. For example, Britain could not repay its debts to the U.S. until the other Allies repaid their debts to Britain. The Americans were not sympathetic. The prevailing desire was recovering the over $25.5 billion the U.S. had loaned to other nations during the war.
As a result of these debts, the war’s victors laid out draconian terms to punish the Germans in the Treaty of Versailles in 1919. War reparations were one third of Germany’s spending. Therefore, Germany’s budget deficit was half of GDP… To make things even worse, reparations were in a foreign currency.
It’s not as if the Germans could print off a bunch of Reichmarks to make good on their reparations. When the Germans defaulted on their obligations, the Belgians and the French moved in and occupied the Ruhr region, Germany’s industrial heartland. The result was widespread strikes and idled productive capacity. Afterwards, demand for goods in Germany far outstripped the productive supply.
As such, with a huge portion of tax revenue going to pay reparations in foreign currency, the German government turned to the printing presses to make good on its domestic obligations. The surge in money supply and the lack of productive resources led to hyperinflation and collapse.
The key to Weimar’s hyperinflation was two-fold.
1. The German government had a large foreign currency debt obligation.
2.The German economy lost huge amounts of productive capacity causing prices to soar as demand outstripped supply.
While the facts in Zimbabwe are different, the underlying causes for hyperinflation were the same: foreign currency obligations and a loss of productive capacity.
Zimbabwe had established independence from Britain in 1980, yet, by the late 1990s, 70% of productive arable land was still held by the small minority 1% of white farmers in the country. After years of talk about redistribution, in 2000, President Robert Mugabe began to redistribute this land.
The redistribution process was a disaster, both legally and economically. Many whites fled as violence escalated. The result was an enormous decline in Zimbabwe’s agricultural production. With agricultural production having plummeted, Zimbabwe was forced to pay to import food in hard currency.
Meanwhile, the government turned to the printing presses to fulfill its domestic obligations. As in Germany, the foreign currency obligations, the loss of productive capacity and the money printing was a toxic brew which ended in hyperinflation.
Hyperinflation in the U.K. or U.S.?
The above is a brief outline of what happened in the two most notorious cases of hyperinflation. Notice that in each case you had an enormous foreign currency obligation and a massive loss in productive capacity. The U.S. has not suffered this kind of loss. In fact, productive capacity swamps demand for goods in the U.S. and…the fiscal deficits in the U.S. are a far cry from the 50% of Weimar.
Without pricing power or a large fiscal deficit and large foreign currency demands, talk of hyperinflation in the U.S. [and the U.K.] is misguided. Crucially, Marshall Auerback writes:
“Inflation is ultimately about competing distributive claims over real resources. The main limitation then, or rather the determinant of the limits of a “sustainable” fiscal policy, especially with respect to hyper inflationary risks, have to do with real resource constraints, not “running out of money” or absence of government financing, for countries possessing sovereign currencies.”
The inability to tax and dependency on foreign currency are central to hyperinflation or national solvency. Moreover, in Zimbabwe and Weimar, it was the trashing of productive supply that created inflation (think supply versus demand).
The above is the economics of hyperinflation. What about the ideology? Well, the Modern Monetary Theorists say that the Austrians ideologues and the gold fetishists have a deflationary bias when inflation doesn’t change the real productive capacity of a nation. Clearly, the hyperinflation talk is a gimmick with which to discourage deficit spending. You should see this debate as about a specific policy prescription driven by ideology. Nevertheless, inflation:
- alters business decision-making via accounting’s tie to nominal numbers and the money illusion…
- reduces relative wealth by transferring income from those who receive the money first (like banks) versus those who receive their money later (your typical widow living on fixed income bonds and annuities)…and
- encourages the accumulation of debt by benefiting borrowers over savers.
I see inflation as a problem to be avoided.
Ideologically, I see inflation as the increase in the money supply and where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency. As such, people like me look at large government deficits in a fiat currency system as an invitation to print money and inflate the money supply. If you take this way of thinking to a logical extreme, you end up with…hyper-inflation.
The above, however, is ideology – not economics. The claims of hyperinflation awaiting the U.S. or the U.K. seem hyperbole at best, misinformation and deception at worst.
Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. [As such,] it simply isn’t credible to claim that hyperinflation in the U.S. or the U.K. is in the offing now or anytime in the immediate future.