Friday, April 29, 2011

Reflections on Hyperinflation

The word 'hyperinflation' conjures up images of people using a wheelbarrow to carry their cash to the grocery store for a loaf of bread.  But Adam Fergusson's classic book When Money Dies shatters that simplistic conception of abundant cash.  The most striking thing in the book was the scarcity of cash during hyperinflation.

The reality of hyperinflation is that money becomes so abundant and circulates so quickly, that it depreciates while you add it up.  Fergusson gives the anecdote of a 5,000 mark cup of coffee costing 8,000 marks by the time you've finished drinking it.  So how can money be scarce, yet so abundant?  Because notes with many more zeroes are constantly being introduced into the money supply.  Here's one way to think of it: imagine a situation where you've only got a $5 bill to buy a loaf of bread.  Yet the Treasury has just introduced $1,000 notes, $5,000 notes, and $10,000 notes into circulation.  Suddenly that $5 bill is worth a tiny fraction of that $1,000 bill.  You're suddenly cash-starved.  The money supply is so large that all the previous notes are simply insufficient to the task of operating as currency.  This is precisely why people used old paper notes as wall paper, toilet paper, fuel--or why people would use wheelbarrows to move large amounts of currency to purchase goods.  There is a large amount of currency in circulation, but only the new bills have any value.

This scenario is what Fergusson describes in his book on the Weimar Germany hyperinflation.  The dangers of hyperinflation are that the money supply is increasing so quickly that people become obsessed with spending--turning their paper currency into something--anything of value, because if they hold it too long it will become worthless.  Paying off personal debts become meaningless in such situations.  Surviving is difficult enough without worrying about paying your mortgage.  You're more worried about getting enough food to feed your family, keeping your furnace running through the winter, and hoping to turn your cash into something of value before it turns into a souvenir for eBay.

Fergusson closes his book with this mournful reflection:   

“In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano.  A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.”  


After reading this book, I am more doubtful that our own situation will come to the sort of hyperinflationary situation of Weimar Germany, though I am more frightened the prospects of such a scenario.  Weimar Germany seems worlds away from our world.  Such sustained, and naive money printing seems unlikely in our world.  Yet I know we are not immune to the same impulses and political pressures.  Still, I am optimistic enough to believe that we are a bit wiser and a bit more leery of non-stop money printing than Weimar Germany.



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Friday, April 22, 2011

The Fed, Inflation, and the Interest Rate

Gonzalo Lira wrote a great piece recently concerning the Fed and interest rates.  It is very long, but a good read. The essence of his argument is that the Fed cannot afford to fight inflation.  To fight inflation would require the Fed to raise interest rates.  But raising the interest rate would drive up the cost of funding our national debt.  He states that roughly a quarter of government spending is already required to pay the interest.  But raising each 1 point rise in the interest rate would require an additional $100 billion in interest expense.  This is exactly what Austrian-economically minded people have been warning about since the first round of quantitative easing was begun.  Ben Bernanke has painted himself into a corner, and getting out of this mess is going to be horrific.


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Inflation and Scapegoating

 I apologize for my long absence from this blog.  I've been absent for a variety of reasons, but this is an important post, and I thought it necessary to comment on it.

While reading Aleksandr Solzhenitsyn's novel November 1916, I was struck by the scapegoating during the inflationary crisis there during the First World War.  The government blamed farmers, merchants, and speculators for high prices as well as the accompanying scarcity of goods.  This scapegoating was accepted by the population at large creating great animosity toward producers by the urban classes.  The reality of the situation, however, was that the Czarist government had been putting heavy inflationary pressure upon the nation, required by wartime spending.  This sort of class rivalry added fuel to the revolutionaries who exploited these same arguments for their own ends.

As I read the novel last spring I knew that the day would come when America would face the same situation.  This article demonstrates that the finger pointing has begun.  The massive inflationary pressures unleashed through our government's deficit spending, TARP, QE, and QE2 have begun to work their way through the economy bringing economic disaster to Middle East countries unable to easily absorb the increasing food prices.  The unrest has added fuel to the inflationary pressures driving oil prices to well over $100 per barrel, and gas prices to $4 per gallon.  Gold has gone over $1,500 per ounce, silver to over $46 per ounce.  Wheat and corn prices are going up as well. 

But our government, in the tradition of all governments before them, are redirecting the blame to speculators, and away from themselves.  The article quotes President Obama saying, ""The Attorney General's putting together a team whose job it will be to root out any cases of fraud or manipulation in the oil markets that might affect gas prices - and that includes the role of traders and speculators. We are going to make sure that no one is taking advantage of the American people for their own short-term gain."

Naturally, if President Obama were truly interested in lowering the price of gas, he would pressure Fed Chairman Ben Bernanke to fight inflation, gut the federal budget, and work toward monetary reform.  But he, nor most anyone in the government is interested in doing any of those things.  Instead, expect to see further recriminations, scapegoating, redirection, and obfuscation.  We live in dark times, when government is the greatest menace in our society.  Our government is a predator, rather than a protector.  God help us!

HT: Mish


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