- Begin Excerpt
- 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
- 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
- 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
- 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
- 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
- "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
- End Excerpt
- Commentary And Insights On A Troubled World
- Copyright 2010 Joel Skousen - All Rights Reserved
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