Hyperinflation – What It Takes To Get There
By Joel Skousen
Editor – World Affairs Brief
I’m not optimistic about where this country is heading, but to properly confront what’s coming it’s very important to understand the real risks facing us and not get misled by hype. I’m getting increasingly irritated by conservative pundits claiming that hyperinflation is imminent, and just around the corner. It is not, and here’s why: simply put we don’t have the automatic, direct injection structures in place for government to deliver those ever-increasing quantities of money directly into the hands of consumers, as they did in the Weimar Republic in Germany. That doesn’t mean it can’t still happen, but the process currently in place works more slowly. We need to understand the process in order to correctly foresee when this threat is really upon us. This week I will dig into this and other intricacies of hyperinflation.
First, let me set the stage by quoting one of the typical hyperinflation projections. Note that all the basic data is correct, only the leap to hyperinflation is unsupported. Here’s Charles Scaliger of the New American magazine [my comments in brackets]:
“Think you’re scared enough about the economy, the ballooning deficit, and the prospect of ruinous tax rates and runaway inflation to pay for astronomical government debts? If you haven’t read Boston University economist Laurence Kotlikoff’s August 10 article for Bloomberg, ‘U.S. Is Bankrupt and We Don’t Even Know It,’ you probably aren’t.
“Dismissing official federal debt figures out of hand as misleading ‘fiscal labeling,’ Kotlikoff estimates that our true fiscal gap is a staggering $202 trillion — about 15 times the ‘official’ debt level pronounced by government statisticians. The reason for this vast discrepancy is the scurrilous practice — used by the federal government to conceal real levels of indebtedness — of declaring certain liabilities, like Social Security and Medicare payouts, as ‘off budget.’ It’s as though these are not enormous sums of money that the federal government has committed to pay out over the next couple of decades as waves of Baby Boomers and Generation X-ers retire.
“The federal government has behaved like an imprudent householder who, having taken out a mortgage, a car loan, and a student loan, proceeds to run up an enormous credit card debt — then declares the last ‘off budget’ and ignores it. Just as laws, credit ratings, and debt collectors will eventually catch up with such behavior in the private sector, so too the pitiless laws of economics will eventually bring our federal government to heel.
“And the day of reckoning won’t be pleasant. Kotlikoff minces no words in describing an outcome comparable to what Weimar Germany endured in the great hyperinflation of the 1920s: ‘Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: ‘Something that can’t go on, will stop.’ True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.’
“And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement [won’t happen–politicians have to pander to the voters to get reelected]. The second is astronomical tax increases that leave the young with little incentive to work and save [that too is political suicide, unless you only “tax the rich”]. And the third is the government simply printing vast quantities of money to cover its bills [and they don’t actually have to print money to create more–electronic creation is the modern way]… And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece [actually bonds are probably the first to realize when the government starts to inflate it’s way out of debt–it destroys their market, which dwarfs stocks].
“Simply put, the lies our government continues to tell itself and us about the debts run up over the past few decades will soon be laid bare. What Kotlikoff has labeled ‘Enron accounting’ has enabled the federal government to perpetuate the deception whereby older generations are subsidized by younger generations. Few Americans are even aware that the so-called ‘Social Security trust fund’ consists only of IOUs [same with the FDIC guarantee of bank deposits]– the federal government spends Social Security ‘contributions’ before they are even paid, just as it spends every last cent of money extracted from the collective taxpayers’ hide. Government neither saves nor invests; it consumes.
“One unpleasant point that Kotlikoff avoids is that there is a difference between tax rates and tax revenues. Simply put, Americans will be neither able nor willing to pay significantly higher taxes [true]. Demands to pay higher income taxes will most likely be met with non-payment or outright revolt, which will leave the federal government only the option of printing its way out of debt. Once the rest of the world figures out that game, though, the feds will find no takers for their bonds, and the end of America as we know it will come about in a tsunami of hyperinflation.”
For that to be true, it requires a detailed analysis of how hyperinflation happened in Germany, 1923-24. Here are a few interesting historical highlights, an excerpt from “Paper Money” by George J.W. Goodman. “Why did the German government not act to halt the inflation? It was a shaky, fragile government, especially after the assassination [Walter Rathenau, the SPD foreign minister was killed in 1922], … In January 1923, Germany failed to make a payment, and France invaded the Ruhr. The vengeful French sent their army into the Ruhr to enforce their demands for reparations, and the Germans were powerless to resist. More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines — Krupp, Thyssen, Farben, Stinnes — condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad.
“Inflation kept everyone working as the pace of the economy [and velocity of monetary circulation] kept accelerating. The cost of living index was 41 in June 1922 and 685 in December, an increase of more than 16 times. The occupation of the industrial region of Germany in the Ruhr valley took place to ensure that the reparations were paid in goods, such as coal and steel. The Mark was viewed as practically worthless. [Now here is one key:] Inflation was exacerbated when workers in the Ruhr went on strike, and the German government printed more money in order to continue paying them for ‘passively resisting.'[That was the first structural step that allowed the German government to start injecting currency directly into the hands of citizens–which allows for a rapid expansion of the money supply, in ever-increasing quantities]
“So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. ‘If you want to save money,’ he was told, ‘and you want two cups of coffee, you should order them both at the same time.’ …By late 1923, the German government required 1,783 printing presses, running around the clock, to print money.”
The payment of “resistance money” to the workers in the Ruhr was not sufficient in itself to cause hyperinflation. Germany was also forced to pay for war victim pensions and compensation for their families. This broadened the flow to a majority of all Germans. So, with over half the citizens having access to an ever-increasing flow of income, the rest of the country began to respond in kind and demand increased wages. Businessmen started raising prices regularly to pay for their increasing labor and material costs, and the process started to gallop away.
A History of the Modern World pointed out that the only ones destroyed initially were those on fixed income: “Annuities, pensions, proceeds of insurance policies, savings accounts in the banks, income from bonds and mortgages – every form of revenue which had been arranged for at some time in the past, and which often represented the economy, foresight, and personal planning of many years – now turned to nothing. The middle class was pauperized and demoralized.” Eventually, almost everyone was hurt.
Tax revenue was quickly devalued by the government’s own rapid inflation, which further induced the government to rely almost solely on inflation to pay for government expenditures. Tax rates couldn’t be changed except once a year, so that source of revenue quickly became irrelevant. Notice that had the government not been able to directly pay so much money into the hands of a majority of citizens, the inflation spiral would have been limited. Price inflation can’t continue unless a large percentage of people have automatically increasing amounts of cash to pay for the rising prices. If the majority does not, buying (for them) slows down dramatically with rising prices and that forces prices to fall in order to attract more buyers.
This has a bearing today. Except for Congressionally mandated stimulus money, which takes time to debate and pass, there is no automatic way for the government to create money and hand it out to consumers. Ben Bernanke’s famous suggestion that he might hire helicopters to fly around and distribute cash from the air earned him the moniker of “helicopter Ben,” but otherwise was only a figure of speech. With exception of one stimulus check, all the bailout money went to the big bankers and insiders. Even if the government started boosting SS payments and pension and welfare payments, it would only cause a slow rise in inflation, but would also damage those on fixed incomes which would complain–forcing Congress to slow down or stop the increases.
There was another factor–the relative size of the monetary base before the inflation. Germany was a moderate sized nation, and had a large economy compared to most other European countries. Nevertheless, the German Mark was not used around the world as an international currency–the British Pound was the major world currency at that time. So, it was not particularly difficult to double the money supply in Germany in one year, and then quadruple it the next. In a 4 year period, the German Mark went from 14 Marks to the dollar to a Trillion to 1. You can’t do that with the dollar today. The dollar has spread out so much around the world as an international currency that there are at least $200 Trillion printed dollars outstanding, and probably $800 trillion in contracts that have never been monetized. That’s a staggering amount.
As I have pointed out before, a $3 trillion bailout of the banks was less than 1.5% inflation of the money supply. I don’t approve of bailouts like this (and there is a lot more money suspected of being created off the books) but one has to understand how this huge base of dollars allows the US to keep inflating without it showing up dramatically as inflation–let alone hyper-inflation. It was inflationary, but only within the speculative economy that the big banks control: the paper stock, bonds, mutual funds, FOREX, and derivative markets. Most of this money just stays in these speculative bets through roll-overs and only about 25% gets invested in the real economy (and most of that is in the industrial military complex. That’s the reason we haven’t had a lot of price inflation. But stocks and bonds are inflated–because they are on the receiving end of government money creation.
Now the last point I want to make about the claims of imminent hyperinflation has to do with misunderstanding the terminology. In short, some misinformed people are saying hyperinflation is synonymous with a loss of confidence in the currency or a flight from currency. This is a factor but it is distinct from hyperinflation. Here’s a typical example from a self-styled economic commentator, Gonzalo Lira, who is actually an expat American novelist living in Chile.
“Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about… [Other more] amiable souls diligently point out that in a deflationary environment–where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking–inflation is impossible. Therefore, hyperinflation is even more impossible.
“This outlook seems sensible; if we fall for the trap of thinking that hyperinflation is an extension of inflation [It is but he’s going to try and disprove that reality]. If we think that hyperinflation is simply inflation on steroids–inflation-plus–then it would seem that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous. But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same–because in both cases, the currency loses its purchasing power–but they are not the same.
“Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth [always fueled by government pumping too much new money into the hands of consumers by inducing banks to loan at rates too low], coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomenon. Hyperinflation is the loss of faith in the currency.”
His definition of hyperinflation is totally insufficient and improper. It is definitions like this that allow Lira and other to claim that hyperinflation is imminent. But, there are many degrees of loss of faith that precede true hyperinflation. We have it right now, to some degree, but are not experiencing hyperinflation. Even with moderate inflation there is a loss of faith in currency. But it is even more true of hyperinflation.
With moderate inflation of around 10% investors and people start trading dollars for other currencies or gold–anything which appears to hold its value better than the dollar. Nations with bigger hoards of dollars can’t unload them all at once on the FOREX lest the dollar’s declining value collapse halfway through the transaction. So they start buying companies in America or commodities for future stockpiles which they intend to use. China is currently on a dollar spending spree buying up industrial metals and oil.
For it to qualify as hyperinflation the rate of inflation needs to rise above the level where panic buying starting to happen –usually in the 20-50% inflation rate per year. Once it goes about 100% per year (doubling the inflation each year) it starts going exponentially upward until government stops the money creation process. Only at that level do we see the total collapse of confidence where people feel that if they wait any amount of time, the money will be worthless.
But this can’t and won’t happen in the US until government gets Congress to allow it to hand out regular stimulus checks to all Americans. Nothing less than that would allow for unrestrained spending. As I have long predicted, I think the financial PTB will continue to gradually increase inflation sufficient to keep people pacified, but not so much as to create panic buying.
Michael Pento explains where the current inflation is going and why it isn’t showing up as significant price inflation: “Wall Street analysts seem to believe that the Fed’s doubling of the monetary base after the credit crunch has not had an inflationary impact on our economy. Their logic can be summed up like so: ‘The money the Fed created and dropped from helicopters has all been caught in the trees.’ In other words, the Fed is creating money, but it is just being held as excess reserves by the banking system instead of being loaned to the public. Therefore, the money supply hasn’t truly increased, there is no money multiplier effect, and aggregate price levels are behaving themselves. But this is only a half-truth.
“Yes, most of the money created by the Fed has been kept by commercial banks as excess reserves. However, the Fed doesn’t conjure reserves by magic. It first creates an electronic credit by fiat, then purchases an asset held by a financial institution. Those primary dealers then deposit that Federal Reserve check into their reserves. The act of creating money from nothing and buying an asset — be it a Treasury bond or Mortgage Backed Security (MBS) — drives up the price of that asset in the open market. Those price distortions send erroneous signals to private buyers and sellers, eventually creating gross economic imbalances. Therefore, the inflation created by the Fed first gets concentrated in whatever asset it has chosen to purchase — before spreading throughout the economy.” In reality, it doesn’t get spread throughout the economy. Too many of the big boys are keeping their funds in the speculative markets and not spending normally.
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