Hyperinflation Q & A

May 30th, 2010

By Brianna Aubin

HyperinflationOne of the main reasons I subscribe to PJTV is because of the Front Page, which usually features Terry Jones of Investors Business Daily and Yaron Brook of the Ayn Rand Institute.  Klavan on the Culture is hilarious, and the other people on PJTV do produce some good stuff, but my favorite program by far is watching Terry and Yaron hash out the economic and political scene with Allen Barton on the Front Page.

This week, there was an economics Q&A with the PJTV viewers on the Front Page.  Viewers submitted questions through the comment section, and the Front Page regulars got to pick out the ones they wanted to discuss on the program.  Since I’ve been worried about the possibility of hyperinflation, I submitted a question on the subject.  As luck would have it, I got answered. Since the video is subscribers-only, I cannot link to it.  But here is the transcript of the relevant portion of the video:

***

My question: How likely is it that we will see a hyperinflation of the dollar?  If it is likely, how long do you think we have, and what do you think could set it off?  If it is not likely, why not?

Ron Brosh: Terry, what’s the likelihood of hyperinflation?

(Brosh was filling in for Allen Barton)

Terry: I don’t think it’s real high.  The reason I don’t think it’s real high is because I think, before they would allow hyperinflation to happen they would take very aggressive moves to stop it.  That said, it’s not impossible, and having been in an economy that hyperinflated, I can tell you it’s very unpleasant.  I was in Nicaragua in 1990 covering their elections, and they were in the midst of a bout of hyperinflation.  And just to carry walking around money, and by walking around money I’m talking about 4-5 dollars, I had to have all the pockets of my jacket, my pants, stuffed with cordobas, they were called cordobas, wads and wads and wads of cordobas, because the money had become meaningless, and it just completely alters the way people behave.  While I think it is possible, it happened in the Weimar Republic in the 1920s in Germany and utterly destroyed their economy, and many historians argue led to the rise of Adolf Hitler, I don’t see it happening here, again, because I think the monetary officials would respond very quickly to anything that even approached double digit inflation.

Yaron: I don’t know if you can zoom in on this, but this is a 100 trillion dollar Zimbabwe note.  100 trillion dollars, you need this to buy a sandwich.  100 trillion dollars.  So this is what hyperinflation looks like.  I lived in Israel in the early 80s when there was 1500% inflation, it’s brutal, it is bad, and it is very difficult to get out of, but I agree.  They will do what they can to stop hyperinflation because the political costs of hyperinflation are very high.  It means a dramatic lowering in the standard of living, your purchasing power is going.  It’s not that the value of the dollar declines, because that depends on what’s going on in the rest of the world.  If we have hyperinflation, but Europe is inflating even faster… it’s really the value of the dollar vis-a-vis the goods that you can purchase, that’s the real measure.  And that means that when you have hyperinflation, the dollar doesn’t buy as much bread, it doesn’t buy as much stuff, and that’s what lowers your standard of living.  I think Terry’s right, they’ll do a lot to prevent this, but what they do to prevent it might be as damaging as the hyperinflation, because that’s how you get into these deflationary spirals.  You crush the money supply, and interest rates go through the roof, and again, this is what Volcker did in ’81 and ’82, interest rates went through the roof to try to rein in the amount of money that was out there, causing this inflation and that was a problem, we went into a pretty deep recession.  What got us out of that recession was that we had Ronald Reagan in the White House, he cut taxes, there was a whole movement of deregulation leading up to that point, a lot of industries were deregulated, and we got out of it.  But imagine a President where we’re doing all that, we’re raising interest rates, decreasing the supply of money, and at the same time, as FDR did, raising income tax, increasing regulation, that could lead to a depression.  So we are in very volatile times, where a lot of different scenarios could pan out — very few of them good.

***

On the one hand, I suppose that’s good news.  Neither of them thinks the Weimar Republic is a likely future.  On the other hand, not only did they not rule out a Weimar Republic, but they didn’t really present any appealing alternatives to that scenario.

Also, I’m not entirely sure that Yaron and Terry are aware of a little gem that Keynes’s heir apparent Paul Krugman put out in his book The Return of Depression Economics (chapter three) about inflation.  I won’t quote, because the info is too mixed up with examples about a baby-sitting co-op that Krugman uses to explain the basics of central banking, but the gist of the info is that to Krugman, inflation can sometimes be a good thing because it helps you get out of a liquidity trap.  Basically, a liquidity trap is when people do not want to borrow or spend money even in a situation where interest rates are extremely low.  Of course, in the real world what this means is that people know the central bank is lying to them about the true cost of borrowing money and they are refusing to take the bait, but in the world of demand economics such a situation is extremely distressing to the heirs of Keynes because it makes their model break down.  The solution, according to Krugman, is to make people spend money by letting them know that they will either use it or lose it, i.e. if they do not spend the money now then the value of their dollars will go down through inflation of the money supply.

So while I’m glad I got my question answered, and the discussion did kick my mind onto some new trains of thought, I don’t think I’ll be crossing the spectre of hyperinflation — let alone all of the other things that could go wrong — off my list of possibilities just yet.


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3 Responses to “Hyperinflation Q & A”



  1. larry ennis |

    Briana
    The closest we’ve come to the inflation numbers your article conjures up was during the Carter years. Even then the figures didn’t get anywhere near what I’d consider hyperinflation. I don’t remember what was happening in the European economy at the time. I will say that the Carter administrarion exercised more fiscal responsibility than we are seeing today.

    I agree with the claims by many that runaway inflation was the main reason that Hitler rose to the leadership of Germany. The people were suffering because the government in control really had failed them. Like it or not, Hitler managed to turn the economy around. Of course I’m not endorsing his behavior but only pointing out the conditions that helped put him in power.


  2. Tom Carter |

    I’m certainly no economist, which means my predictions about inflation may be somewhat more believable than those of practitioners of the “dismal science.” But seriously, I agree that we’re a very long way from anything approaching hyperinflation. However, as we’ve been discussing here, all bets are off if the euro collapses on top of all the other economic problems in the world right now. Just about anything could happen.

    I’ve lived in countries experiencing high inflation, to include one that had just gone through a period of true hyperinflation. The human misery that results isn’t pretty.

    Larry, I don’t mean to pick nits, but the hyperinflation of the Weimar period wasn’t a cause but an effect of the political and economic situation in Germany after World War I. The huge cost of a failed war, the crushing burden of war reparations, gross political instability, serious conflict between left and right factions, and a highly disaffected public all combined to produce the chaos (including hyperinflation) from which the Nazis rose.


  3. Brianna |

    I don’t think hyperinflation is a likely possibility, because the potential global ramifications of such an occurance would be so horrific (I think it could honestly precipitate global economic collapse) that the authorities would be insane to allow it to happen, and would do almost anything to prevent it. However, I agree with Yaron when he points out that a lot of the things they might do to avoid inflation would be nearly as bad, and that there are few good potential future scenarios out there. I also don’t trust the current bozos in charge of economic policy to act responsibily or with full knowledge of the ramifications of what they are doing. The fact that Krugman seems to be the country’s economist du jour truly scares me. And let’s not forget that the increase in the money supply over the past couple of years has been huge. If that money started to truly circulate through the economy as Krugman and the printers seem to think it should, things could start to get very ugly.


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