Ambrose Evans-Pritchard has written a very illuminating article titled "The Death of Paper Money" which discusses how the social fabric of society is destroyed by hyperinflation. He notes that bankers around the world are currently reading a book called Dying of Money: Lessons of the Great German and American Inflations to educate themselves on the mechanics of hyperinflation. Evans-Pritchard goes on to describe some of the conclusions reached in the book as to what sparked hyperinflation in the Weimar Republic:
This is a very important point that few people understand regarding hyperinflation. Hyperinflation does not happen immediately after money printing; it usually takes time to develop as people gradually lose confidence in their currency. It took two years after a increase in the money supply before it hit, but once it began, the genie was out of the bottle. You will note that current economists and deflationists state that because the US has not yet entered high inflation as a result of the Fed's money printing, then it is proof that we will not have inflation. This is the same specious argument used by Weimar economists who contended that an increase in the money supply does not lead to inflation (they even said this during the hyperinflation). One other point to remember is that once the velocity picks up, it is to late to stop it by reducing the money supply. This is another bogus argument used by apologists for the Federal Reserve who state that if we ever have the beginnings of significant inflation, the Fed will simply drain excess reserves from the banking system, and that will solve the problem. This is completely impossible. The only way the Fed could stop hyperinflation would be to drain the excess reserves before the velocity started to pick up--not wait until it starts because then it is too late. Evans-Pritchard goes on in his article to describe how German society collapsed with neighbors turning against each other as they fought for survival:
For more information on hyperinflation I have a previous article on surviving hyperinflation.
Black Swan Insights
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.
"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".
This is a very important point that few people understand regarding hyperinflation. Hyperinflation does not happen immediately after money printing; it usually takes time to develop as people gradually lose confidence in their currency. It took two years after a increase in the money supply before it hit, but once it began, the genie was out of the bottle. You will note that current economists and deflationists state that because the US has not yet entered high inflation as a result of the Fed's money printing, then it is proof that we will not have inflation. This is the same specious argument used by Weimar economists who contended that an increase in the money supply does not lead to inflation (they even said this during the hyperinflation). One other point to remember is that once the velocity picks up, it is to late to stop it by reducing the money supply. This is another bogus argument used by apologists for the Federal Reserve who state that if we ever have the beginnings of significant inflation, the Fed will simply drain excess reserves from the banking system, and that will solve the problem. This is completely impossible. The only way the Fed could stop hyperinflation would be to drain the excess reserves before the velocity started to pick up--not wait until it starts because then it is too late. Evans-Pritchard goes on in his article to describe how German society collapsed with neighbors turning against each other as they fought for survival:
Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.
"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.
Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to understand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.This passage sends chills down my spine because it could easily happen here in the US. You also note how people start to look for scapegoats like hoarders, speculators, etc. This way of thinking is usually encouraged by the government to shield itself from responsibility. They tell the people that prices would not be going up if it were not for these evil people. This kind of sentiment within a society leads to violent mobs going around killing people they suspect of hoarding or speculating. The only problem with Evans-Pritchard's article is that he refuses to surmise that this terrible situation could ever happen to the US or Europe in modern times. He notes:
As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s.He seems to have forgotten the lessons in the book he is discussing. One last thing to remember in this great debate on inflation versus deflation is considering which one is worse. Modern economists and most certainly the Federal Reserve will tell you that deflation is a greater evil, and thus we should err on the side of inflation. If you asked Germans who lived through both (between 1920-1940,) they would contend that hyperinflation is to be feared more than deflation.
For more information on hyperinflation I have a previous article on surviving hyperinflation.
Black Swan Insights
Very good article, thank you!
ReplyDeleteHyperinflation is the worsk of all worlds.
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