Thursday, May 28, 2009
Hyperinflation bankruptcy and the United States.
| If you listen to the pundits, the economists and the politicians, we are about to enter a period of deflation, hyperinflation, a rebound in the economy, or another Great Depression. And for every opinion there is an expert refuting that opinion. What does history tell us about the future? Over the last week or two one of the biggest stories has been this article by Ellen Brown http://www.globalresearch.ca/index.php?context=va& aid=13673. Brown makes the case that Hjalmar Schacht let the cat out of the bag and said the real reason for hyperinflation in Germany was speculation, and not government printing of money. This story is old news, and in fact was told often in the 1920s by Eastern Germans. These folks (or Volks if you will) blamed Jewish speculators. The reality is a bit more boring. Schacht as president of the Reichsbank introduced a new Reichsmark based on Gold and able to be negotiated outside the country. The Germans also stopped printing any new money, and cut government spending drastically. This is exactly what Keynes told the Germans to do in 1922. It just took them 18 months to get the lesson. Once a currency is tied to gold or otherwise stabilized, the speculation ends. When I hear a pitchman for gold say the value of gold will rise I can't suppress a chuckle. The value of gold has never changed, the value of the dollar falls, and so the price of gold in relation to the currency under attack falls. In short, speculation was only a symptom of hyperinflation, not the cause, and Weimar's hyperinflation was caused by the same forces that caused Austrias, and Zimbabwe later on in the century. Government spending, borrowing and printing too much money. There are really two lessons here. The first is of course speculation is by-product of a weak currency, it doesn't cause inflation, and in fact in a stable currency, it cannot. The other lesson is just as important. Many politicians around the world are citing keynesianism as the premise for increasing the money supply. This isn't stretching Keynes, it is simply a lie. Keynes knew that printing money and rampant spending would cause inflation and after a point hyper-inflation. There exists no theory of economics, and no mathematical equation that would allow a nation to expand its money supply at the levels we are seeing, without a corresponding rise in productivity. So what will happen in The United States? The historian will tell you that inflation is a certainty. But hyper-inflation is not yet inevitable. To understand what is really happening you'll need to understand one thing about hyper-inflation. It is in fact a form of bankruptcy. Perhaps I could word it better by saying it is an attempt by politicians to avoid bankruptcy. And we all know what bankruptcy is, right? Here we have a slight problem. It turns out most of us don't understand what bankruptcy really represents. Bankruptcy is not when you run out of money, it is when you run out of resources. General Motors is the perfect example of this "new" bankruptcy definition. They ran out of money, but few if any resources were sold off to raise money. The United States may very well experience hyper-inflation and the horrors accompanying a mass devaluation. If we do,it will have been a tragic failure of our politicians to understand basic economics, and recent history. To avoid the slow starvation and strangulation of hyper-inflation, we will of course need to stop printing money, and cut the budget. But to suggest that the damage is done isn't really true. The United States is rich in resources, both natural and human. Unleashing these resources will boost productivity, and increase the value of the currency. The exploitation of natural resources has gotten a bad reputation lately. But this is just clap trap. Every dollar ever created has at its root the exploitation of natural resources. The politicians in Washington could get away with increasing the money supply without causing hyper-inflation, if they started a massive effort of deregulation of exploitation of natural resources, and human resources. As the economy starts to rebound, we would need to cut government spending at all levels, and begin to pull money back out of circulation. History tells us this won't happen until the people have suffered severe back pain as a result of hauling wheel barrows full of currency to the market three times every day, lost their life savings, and sunk to a level of misery that affords no lee-way to the progressive politician. Tragically the interregnum is usually marked by scapegoating and either race or class warfare that exponentially increases the destruction. THE BRIGHT SPOTS AND HOPE FOR THE FUTURE. The United States has a wealth of resources to exploit, and the rule of law usually returns from its vacation just in time to save the nation. Much of the money government spends doesn't really help anyone but the government bureaucrat receiving a paycheck to administer the program. And so deep cuts are never as painful as the politicians believe. The rugged individual is in-bred in most Americans. We are a nation that still believes strongly in individual responsibility and a strong work ethic. The United States has a great track record over the last four or five decades of avoiding race and class blaming. By the time Hitler took over Germany, anti-semitism had been festering for sixty years. Elections held every two years allow us to get back on the right track quickly. As an amateur historian there is only one certainty I know of in history. Nothing is inevitable. By every objective observation, Russia at the turn of the century should have become a liberal republic and growing industrial power. World War II should have been easily avoided by checking Hitler early in his adventurism. And The United States should have run her economy aground in the late 1970s and early 1980s. But these things didn't happen. In every case one or two singular events was changed, and caused either mass slaughter of entire races, or an economic revitalization that restored a nation. Hyper-inflation may be likely in the very near future, but it is not a certainty. Ninety percent of economists believe the economy will recover soon. This may not happen and we could have another Great Depression. But nothing on the horizon should lead us to believe that a Lenin, Hitler or Mao is waiting in the wings to seize power and slaughter millions of innocent human beings. The recent struggles in Iraq have again shown us clearly the dangers of armed conflict, and much as Vietnam did in the seventies, will cause all of us to assess future wars with a keener eye. Lessons of the past are much more widely available to the masses, and the information spreads much more quickly. Economic policy mistakes should be remedied much more quickly than ever before, and thus the bad times should be easily mitigated. But I say again, nothing in history is predictable, or inevitable. Eric Gurr egurr@intralinkinc.com |
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