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Hyperinflation Warning

Economics / HyperInflation Aug 09, 2010 - 02:33 AM GMT

By: Howard_Katz


Best Financial Markets Analysis ArticleOne hears much discussion of hyperinflation on the gold web sites.  It is a worst case scenario and used to alarm and excite.  It is used to designate a period when prices are rising very rapidly, the favorite example being Germany of 1914-23, and during this time prices rose by very close to one trillion times.  That is, a piece of bread which started off costing 1 mark ended costing one trillion marks.  So it is not merely in today’s world that we are using numbers above 1 trillion.  But it is an instructive period of history, and we must always keep in mind that those who do not learn from history are doomed to repeat it.

The last part of “hyperinflation” is “inflation,” and this is perhaps the most important part (because it receives the least comment).  If we examine the word “inflation” as it is used outside of economics, then it always means a going up.  For example, one inflates a balloon or an inner tube.  Always it refers to something which gets bigger.

This was not always the case.  If we study the price rises which occurred between the American Revolution and the Civil War (the rise in prices associated with the continental during the Revolutionary War, the price increase of the War of 1812 and the price increases in both North and South during the Civil War itself) they are never called inflations.  They are always called depreciations.  And depreciation has the exact opposite meaning from inflation.  It means a going down or a getting smaller

Well, what is going on?  Is something getting bigger, or is something getting smaller?  Well, any writer who comments on the price increase of the American Revolution will call it a depreciation, i.e., a getting smaller, because the continental lost 99% of its value between 1776 and 1780.  This was universally regarded as a going down of the continental, not as a going up of goods, because prices remained the same both in terms of the English gold currency and in terms of the Spanish silver currency.

The situation was the same during the War of 1812.  The legal U.S. currency at the time was the gold or silver dollar.  This did not depreciate, and prices did not rise in its terms (example, New England).  Prices only rose in terms of paper bank “notes” which circulated as (unofficial) money in the central and southern states, and this is universally recognized as a depreciation of these “notes.”  A similar situation existed during the Civil War because, although prices rose through most of the North, California remained on the gold/silver standard and had price stability.  This was not an inflation.  It was a depreciation of the greenback.

After the Civil War, there was a big debate about the legality of the paper greenback.  The dispute went to the Supreme Court, which ruled in 1870 that the greenback was not legal money and that only gold and silver coin were a legal tender in the United States (Hepburn decision).  However, the paper money forces were trying to prevent a return to gold/silver money; they did not give up but threw themselves into the battle more intensely.  The Hepburn decision was by a vote of 5-3.  This shows just how out of step the paper money forces were.  Because of the secession of the South, 4 judges had retired from the (8 man) Supreme Court, and this gave Lincoln 4 appointees.  One would have thought that these were 4 solid votes for Lincoln’s greenbacks, and indeed he appointed what he thought were 4 safe votes.  First, the 4 old justices, who had been appointed with no attention to their views on this issue, went solid for gold/silver money.  And second, Chief Justice Samuel Chase (after whom Chase Bank was later named) deserted the Republicans.  When Chase studied the issue, he could not, in conscience, vote for the legality of paper money in America.  So he joined the Democrats even though he had been Secretary of the Treasury under Lincoln and had issued the greenbacks and ruled his own action (in so issuing) illegal.  (Ah, yes, in the old days people put country above party.)

The Republicans, believing that paper money was popular and influenced by the fact that Lincoln had been raised to hero status by his assassination, created a 9th position on the Court.  A Democrat retired from old age, and this gave President Grant two appointments to the Court.  He used them to appoint two known paper money advocates.  These tilted the balance, and the new Court voted in favor of paper money 5-4 (Legal Tender decision, 1871).

So when a judge or a legal “scholar” tells you that the courts are bound by precedent, you know that he is a liar and a fraud.  In 1871, the Supreme Court looked precedent right in the face and spit on it.  The Constitution was explicitly written to ban paper money.  Even the advocates for paper money at the Constitutional Convention of 1787 openly stated that, if the proposed constitution passed into law, then paper money would be permanently banned in America.  (“The convention was so smitten with the paper money dread that they insisted that the prohibition be absolute.”  See the debate at the Constitutional Convention, Aug. 16, 1787 in which an opening wedge for paper money was voted down by 9 states to 2.)

After their victory in the Court the paper money faction moved aggressively and proposed that resumption (of gold/silver) be postponed.  Congress approved this measure in 1874.  President Grant was going to sign this into law, but upon reading it over for the last time before signing it, he changed his mind and vetoed the postponement measure instead.  (Yes, in the old days politicians actually read bills before voting on them.)

Then Congress returned home for the 1874 election and got the shock of their lives.  The country was soundly pro-gold.  The Republicans did a 180º reversal and became the pro-gold party, which led to their dominance for the next 6 decades, in particular the election of 1896.  During this time America became the most powerful economy in the history of the world.

But also during this time the basic language changed to call a general rise in prices an inflation instead of a depreciation.  This was a major victory for the paper money forces because it allowed the argument that goods were going up (instead of the currency going down) to be accepted by the naïve.  If goods were going up, then the fault must be with goods.  Therefore, let’s make a law against a rise in goods (as the Emperor Diocletian did in the early 4th century).  This led to the collapse of the Roman economy and in turn the collapse of the Roman Empire.

In your next economic discussion, try the experiment of using the correct concept and calling a rise in prices a depreciation of the currency instead of an inflation of goods.  Wham, things will turn around so rapidly that you head will spin.  All of a sudden the other fellow will see your point and admit that the increase in money is crucial.

Take the recent debate which has been going on in the internet sites since 2008 as to whether the country is going to have “deflation” or “inflation.”  You have been following this debate and know that there is a substantial opinion predicting “deflation.”  Here at the One-handed Economist we know that this is like a debate between the math professor and the idiot from off the street who argues that 2 + 2 = 5.  The “deflationistas” are going to lose, and the subscribers to the One-handed Economist are going to take their money.

How do we know this?  Because they have been losing since the Civil War.  They have not only been losing in the United States.  They have been losing in every country in the world.  Fortunately for us these people have short attention spans.  We beat them.  We take their money.  Then they forget.  Then we beat them again, etc.  Some people never learn.

The astute commodity speculator can see the signs.  Just this week the Nov. CRB index went to a new relative high (above 500).  Wheat broke out of a triple bottom.  Cocoa and coffee are rivaling gold in their quest for new highs.  The large depreciation of the currency which I predicted after seeing the massive creation of money by the Fed in 2008-09 may be ready to start here and now.  It will start in commodities.  Then it will move to the Producer Price Index.  And then it will move into the Consumer Price Index.  Then the newspapers will acknowledge it, and only then will the “deflationistas” get scared and rush to buy gold.  This is what they did in 1979.  Those who do not learn from history are doomed to repeat it.

So you see there is justice in the world.  Through the One-handed Economist you get rich via my advice.  I get rich, both by taking my own advice and by selling it to you.  And the bad people of the world lose their money to us.  There is a harmony in the world if you can see reality as it is and know how to take advantage of it.

I usually shy away from predicting “hyperinflation,” partly because inflation is the wrong concept (as above) but also because an extreme depreciation of the currency is very rare.  The favorite example is 1923 Germany.  The worst case is Hungry, 1946.  But we have a second worst case recently in the country of Zimbabwe over the past decade.  It is a shocker.

year     rate of in-
           crease in prices

  1. 56.9%
  2. 55.22%
  3. 112.1%
  4. 198.93%
  5. 598.75%
  6. 132.75%
  7. 585.84%
  8. 1,281%
  9. 66,212.3%
  10. 231,150,888.87% (July)

In January 2009, the Zimbabwe dollar ceased to circulate, and the current monies used in Zimbabwe are the U.S. dollar and the South African rand.  The Zimbabwe dollar came into existence in 1980 at a value of $1.59 (U.S. dollar).  Official statistics for July 2008 put “inflation” at 231 million percent.  In November 2008, Professor Steve Hanke estimated Zimbabwe prices were rising at 89.7 sextillion percent annually.  (A sextillion here in the U.S. is 1,000,000,000,000,000,000,000.)  The official rate of unemployment is 95%.)

Von Mises pointed out that, once a money expansion starts, it tends to accelerate to the upside.  This is because the paper aristocracy is in control, and they need to crank the printing presses faster and faster to maintain their profits.  We saw the same thing in the U.S. in 2008 as Goldman Sachs declared a crisis and got the Fed to massively increase the quantity of money.

Over the past decade, expected life-span in Zimbabwe fell from about 60 years to about 40 years.  It is impossible to conceive of such a thing without a corresponding reduction in population, say from 12 million to 8 million.  Such a reduction may have already occurred, but the official Zimbabwe statistics do not admit it.

If virtually no one in the country is employed, then Zimbabwe has returned to the Stone Age, and people are getting their food by hunting and gathering.  A recent law forbade Zimbabweans from withdrawing from their own bank account an amount of money greater than 25¢ (in U.S. dollars) per day.  The decisive event which brought an end to the depreciation occurred when doctors and nurses walked out of the hospitals due to absurdly low real pay, and the country was hit by a cholera epidemic.  It would not at all surprise me if 4 million Zimbabweans have died.  Meanwhile, Gideon Gono, the head of the Zimbabwe Central Bank and the man printing the money, drives a 12 cylinder Mercedes Benz and lives in a 47 bedroom palace down the street from dictator Robert Mugabe.  His home has a swimming pool, landscaped gardens and a gym bigger than many houses.

The important thing to understand is that the theory behind the Zimbabwean depreciation is exactly the same as the theory behind our depreciation here in America.  If Zimbabwe “stimulates” its economy and 4 million people die and the rest are driven back to the Stone Age, then how can the exact same policies lead to anything but the same result in America?

To show people how true knowledge of economics can help them make money in these terrible times, I publish a fortnightly (every two weeks) economic letter (which has been bullish on gold since 2002).  This is the One-handed Economist ($300 per year)  You may subscribe by going to my website and pressing the Pay Pal button, or you may subscribe by mailing $290 ($10 cash discount) to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  The regular issues are dated every other Friday and are posted on the site (password protected) on Sat/Sun.  The most recent regular issue is 8-6-10, and the most recent special bulletin is 7-29-10.

Oh, gold was hit in late July  Please listen close; I ring my bell
Al Abelson’s the reason why.           To tell you they’re the last to sell.

Thank you for your interest.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Shelby Moore
09 Aug 10, 09:59
Why hyper-inflation

"Von Mises pointed out that, once a money expansion starts, it tends to accelerate to the upside. This is because the paper aristocracy is in control, and they need to crank the printing presses faster and faster to maintain their profits."

That isn't the entire cause of hyper-inflation. Rather it is caused by the public realizing that the currency is (or destined to be) losing value at a very fast pace, and the public dumps the currency for hard assets. I explained this in more detail:

Once the public realizes that the government is unable to service the interest payments on the federal debt (greater than 100% of tax revenue) and by that time the government spending is most of the economy, then the public knows it is impossible for the economy to sustain without government printing money to pay its obligations. And it is impossible for the government to reduce (austerity) its expenditures, because nearly the entire economy is the government at that point. By delaying the onset of the hyper-inflation, the stimulost programs have been increasing the government as percentage of the economy:

So on realizing the death spiral is unavoidable, the public dumps the currency and the government must print currency at faster rates in order to incentivize people to take the money and keep the economy functioning. As Katz explained for the Zimbabwe example, this fails over time, as people eventually refuse to accept the currency for anything at any price and all work stops and the people die of starvation and disease.

But to the extent that the public is able to conduct transactions in hard assets (silver is best, next gold, next barter assets), then the economy is able to function minimally and some people are able to work. But the government will usually try to prevent this, in order to force the legal tender currency to be accepted as a monopoly. The government is economically forced to become fascist.

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