Monday, September 2, 2013

Learning the Right Lessons from Hyperinflation History

America needs to invest in fundamental solutions to key challenges.  The investments needed must be carefully considered. We have limited resources. We live in a finite world. We need our thinking caps on. We discuss the challenges here. LINK

But as soon as you start talking about what we can do- there is an outcry of fear mongers, special interests and naysayers who raise their voice to say why we cannot do this.

One of these loud screams centers around the theme of  "you are on the road to hyperinflation!" Stories of the Weimar Republic are told. Zimbabwe is brought up and a damning description of how we are on the same road to ruin- makes people shudder and nod that we cannot go there.

Well, there are lessons to learn from periods of hyperinflation. We need to separate the truth from the fiction. We have really serious challenges in this country and we need a firm grasp of the challenges and the tools we can muster for solutions. We need government investment, and so therefore we need everyone to better understand the true ramifications of using money. We have to separate the faux issues from the real challenges, LINK if we want to progress to a prosperous future. We stand in our own way otherwise.

Talking about hyperinflation gets rather complicated when you go into the details. It is much easier to show pictures of 100 trillion dollar Zimbabwe notes than to go into the myriad of details that took Zimbabwe down this path of ruin.

When issues get complex,  it is essential to find sources that are as simple and coherent as possible without being too simple. Many others tell this story better than I. Therefore, I will keep my notes brief and rely on others. I also admonish you to dig down a bit because the simplified canards about hyperinflation tie our hands to deal with unemployment and future opportunity, environmental pollution and energy issues, and all the other challenges we face.

We are the equivalent of being at war but without a well defined enemy. We are living on a finite earth in an unsustainable manner which is the equivalent of being in a war you are losing. If we cannot bend the trajectory we are on, more millions will die every year as nature takes its course. We travek this philosophical path here. LINK but right now we are trying to create clarity around the concept of hyperinflation.

So lets briefly discuss the Weimar republic first.  I am going to paraphrase information provided by economist L. Randel Wray. He wrote 3 articles- they are erudite but not your usual light read.. at least for me... You can find the series here. 

Germany had lost WWI and was suffering under the burden of large reparations payments— payable in gold.

[caption id="attachment_185" align="aligncenter" width="300"]I inherited a coin collection as a kid with a lot of Weimar money in it. I learned about hyperinflation at an early age. I inherited a coin collection as a kid with a lot of Weimar money in it. I learned about hyperinflation at an early age.[/caption]

Weimar Germany's productive capacity had been ravaged by war, and by removal of industrial equipment by France as war reparations. Weimar had few gold reserves but was expected to export goods to raise more gold to make the payments demanded by the victors.

Germany’s productive capacity could not satisfy domestic demand, much less goods for export to pay reparations. The Weimar Government knew that it was not only economically impossible but also politically impossible to impose taxes at a sufficient level to move resources to the public sector for exports to make the reparations payments.

Instead Weimar relied on spending. This meant government competed with domestic demand for a limited supply of output. This drove prices up. At the same time, Germany’s domestic producers had to borrow abroad (in foreign currency) to buy needed imports. Rising prices plus foreign borrowing caused depreciation of the domestic currency, which then spiraled out of control, as imports increased in costs, increasing borrowing costs, but then increasing the cost of reparations in the Weimar currency.

We will address the common causes after we talk about Zimbabwe.

[caption id="attachment_182" align="aligncenter" width="300"]I wonder what it really is worth I wonder what it really is worth[/caption]

Zimbabwe was going through tremendous social and political upheaval after civil war with unemployment reaching 80% of the workforce. Domestic GDP had fallen by 40%. Domestic food production had collapsed after controversial land reform subdivided farms. Government had to rely on food imports and IMF lending— here, again- a case of external debts. With food scarcity and government and the private sector competing for greatly reduced supply, prices were pushed up. Here was another situation where the government could not raise taxes for both political and economic reasons.

Both Weimar and Zimbabwe are tragic cases and millions of people were injured in the process, but to simply label this a simple case of government spending run amok and printing fiat money not backed by gold as the cause- does not really shed light nor explain the problems in either Weimar or Zimbabwe and certainly conclusions drawn on our own situation in America are far fetched. (my technical term)

There are commonalities which we can draw from cases of hyperinflations in the 20th century. First, most of them occurred during a civil war, with a regime change. A majority also occurred with large debt denominated in foreign currency (this included Austria, Hungary, Weimar Germany, Argentina, and Zimbabwe).

The conclusion I (Stu) want you to draw from this- we must not let naysayers tell us what we cannot do using unsupported hyperbole not backed up by real evidence and careful study. We have millions of Americans longing for a way to be productive and add products and services for Americans to buy. We have a serious problem of a lack of aggregate demand, even with a level of deficit spending by government now. So tell me again how we need to fear hyperinflation? In America?

We do have issues with potential inflation. The are cost push resources issues. Every time there is a new story that the economy is getting better, the price of oil goes up. We need government investment to solve energy issues. We need to concentrate our wits on real challenges and put the silly made up problems behind us.

">Here are more resources to better decide about hyperinflation and how much of a potential problem we have with it.

Again L. Randall Wray - Zimbabwe! Weimar Republic! How Modern Money Theory Replies to Hyperinflation 

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