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View Full Version : Hyperinflation case revisited: Will we complete the trip? - Eric Janszen



EJ
02-19-09, 07:58 PM
http://www.itulip.com/images/Whiskey.gifHyperinflation case revisited - Part One: On the road to hyperinflation. Will we complete the trip?

We have for ten years made the case for high inflation as an outcome when the US economy, heavy with public and private sector debt, meets debt deflation in an eventual crisis. Yet we have remained just as skeptical about the hyperinflation spiral case as we have about the deflation spiral case represented by Mike Shedlock since 2005.

Respected contrarian market commentators recently issued warnings of imminent hyperinflation in the US, most notably economist John Williams, purveyor of alternative and de-politicized government statistics at ShadowStats, and Jim Sinclair, the granddaddy of gold-centric geopolitical market analysts. In recent weeks their warnings are increasingly urgent. Lately Williams is pressing his followers to double down on gold and stock up on Whiskey for barter, while Sinclair proclaims “this is it” as in “the big one” that the doomers have warned about for decades.

As we noted back in 2001, the US is certainly on the road to hyperinflation. Inflation is the policy, the answer to every ill. But the road from inflation to hyperinflation is long, and there are ways to get off. Carmen M. Reinhart, Deputy Director, and Miguel A. Savastano, Advisor, IMF Research Department in June 2003 published “The Realities of Modern Hyperinflation” to make the case that, despite falling inflation rates worldwide, hyperinflation could happen again:
AFTER World War I, a handful of European economies succumbed to hyperinflation. Austria, Germany, Hungary, Poland, and Russia all racked up enormous price increases, with Germany recording an astronomical 3.25 million percent in a single month in 1923. But, since the 1950s, hyperinflation has been confined to the developing world and the transition economies. The milder problem of chronic high inflation ceased to be a problem in the advanced economies in the 1980s and in the developing countries in the 1990s.

The benign inflation environment of recent years may lead some to believe that chronic high inflation and hyperinflation have been eradicated for good. History suggests that such a conclusion is not warranted. Mainly to keep this important issue at the forefront of policy debate, this article reviews the broad patterns in key macroeconomic policies and outcomes in all episodes of hyperinflation that have occurred in market economies since the mid-1950s.
The article goes on to list “the seven lessons that emerge from this overview of modern hyperinflations” that “policymakers would do well to bear in mind.” We list them below with comments relating them to the US case, noting that while the IMF is not issuing disinterested advice, there is still value in the analysis.
1. Hyperinflations seldom materialize overnight and are usually preceded by a protracted period of high and variable inflation.
Note: The Great Inflation of the late 1970s and the inflationary energy cost-push inflation 2004 to 2008 are unlikely to produce rising inflation expectations, especially when the mainstream financial press beats the deflation drum. Of the seven lessons of hyperinflations, this one applies the least to the US case.
2. Stabilization may take years if fiscal policies are not adjusted appropriately. Even when fiscal adjustment is implemented, it takes time to achieve low inflation, especially when money is used as the nominal anchor.
Note: The question of monetary anchor in a dollar hyperinflation is interesting because the dollar has itself has for decades acted as a monetary anchor for nations experiencing hyperinflation. Recall a brief period when the dollar declined to 40% against the euro and street vendors in Vietnam, for example, stopped accepting dollars. If the dollar is a monetary anchor, then what is the dollar’s monetary anchor? It is nothing more than the faith that the US government will take the necessary steps to halt inflation should it arise, as in the early 1980s when fiscal austerity put the US economy into two wrenching recessions that brought inflation down from double digits to zero. Sound economic, fiscal, and monetary management is the nominal anchor for the US dollar.
3. Sharp reductions in fiscal deficits are always a critical element of a stabilization program, regardless of the choice of monetary anchor.
Note: The previous example of the early 1980s US case notwithstanding, coming from the IMF this advice is directed at countries that are clients of the IMF, such as South Korea during the 1997-1998 currency crisis, not the IMF’s primary patron, the USA itself. It is important to remember that the US economy was growing and the US was a net creditor at the time the US government undertook austerity programs in the early 1980s. Today the US starting position is closer to that of nations that do experience hyperinflation, large external debts and falling output. Under the same circumstances that call for austerity and constrained fiscal spending in South Korea, we expect the US will continue to take the opposite approach and further increase fiscal deficits, despite the risks. Of the seven lessons of hyperinflation, this is the one that we most need to keep an eye on in the US case.
4. Unifying exchange markets and establishing currency convertibility are often essential ingredients of stabilization, irrespective of the choice of main nominal anchor.
Note: Again, this advice is directed at IMF clients not the US. Our contacts tell us that South Korea, Malaysia, Indonesia, and other Asian nations that have built substantial currency reserves since the 1997 to 1998 crisis do not intend to follow the IMF plan and allow their currencies and economies to be wrecked, again. They are aware that their reserves make them targets for speculators. To our knowledge, all of them plan to immediately impose capital controls to thwart any future attack on their currencies.

The US will, of course, do likewise should it be threatened with the risk of capital flight. This will help contain the cycle of currency depreciation and cost-push inflation that feeds a hyperinflation. Jim Sinclair rests his hyperinflation case on cost-push inflation from a collapsing dollar resulting from capital fight. We don’t see it; the US will shut it down. Open exchange markets and currency convertibility only apply to IMF clients during crisis, not to the US. In any case, the IMF’s Asian clients learned their lesson, although their newer clients in eastern Europe apparently didn’t learn Asian crisis lesson.
5. Output collapses during, and sometimes in the run-up to, hyperinflation. Although stabilization measures cap the implosion in economic activity, there is little evidence to suggest that they kindle a robust rebound in economic activity.

http://www.itulip.com/images/businesssectoroutput.gif
Output: Rapid Decline

http://www.itulip.com/images/FedReceipts1950-2009.gif
Federal Government Receipts: Rapid Decline

http://www.itulip.com/images/federaloutlays.gif
Federal Government Outlays: Rapid Rise


Note: There can be little doubt that US economic output and government receipts are shrinking rapidly while government outlays are rising. Only time will tell how the decline in output figures into a possible hyperinflation future.
6. Hyperinflations are accompanied by an abrupt reduction in financial intermediation.
Note: In other words, when money ceases to function as a store of value, people stop using it. They resort to cash transactions and barter -- John Williams recommends whiskey (http://www.youtube.com/watch?v=U3I0HwcrzWo). During the Russian hyperinflation in the early 1990s vodka was the primary item of barter, so his suggestion is not off-the-wall if in fact a US inflation developed to hyperinflation levels.
7. Stopping a hyperinflation does not restore demand for domestic money and domestic currency assets to the levels that prevailed before the hyperinflation began. Capital returns to the country when high inflation stops, but dollarization and other forms of indexation dominate financial intermediation for many years.
Note: Once a hyperinflation has wiped out everyone’s savings, the disaster is not soon forgotten. The currency of the country where the hyperinflation happened is branded a risk, as is every asset that is denominated in it.

Before we go further, let’s be clear about what a hyperinflation really means in practical, every day terms.


Imagine taking every long term contract in your file cabinet – your mortgage, auto loan, student loan, insurance policy, health care insurance, and so on – and ripping them up. There is no insurance or credit in a hyperinflation. All transactions are cash or barter.
Imagine an ongoing public panic into non-paper assets. In the early stages of a hyperinflation, the most efficient inflation hedges, due to their compact size and liquidity –- precious metals -- disappear in a few weeks. At extremes of hyperinflation, over 1000% per year, hoarding becomes absurd, with items of seemingly little value used as stores of value, such as copper plumbing fittings and brass doorknobs. Anything made of copper, brass, lead, aluminum that is not either nailed down or guarded is stolen and used as a substitute for cash.
Imagine society breaking down. Money based relationships disintegrate. As the purchasing power of everyone’s savings is gone, everyone becomes completely dependent for cash for day-to-day survival from income earned from whatever they can do or sell. Employers index salaries to inflation, but as the economy will have come to a standstill and output has collapsed, the unemployment rate will exceed 50%. Without tax revenue, state and local governments are crippled, and the police are as desperate as everyone else. Crime flourishes. (A friend recently back from Argentina told me that he was repeatedly stopped by police on the street and asked for money.)

On the international scene, for any country that uses the dollar as a nominal anchor to stabilize its own currency, a dollar hyperinflation means certain hyperinflation for them, too. Countries will de-peg from the dollar before that happens; likewise countries that use the dollar for international trade will drop the dollar.

We all remember what happened in countries that use the dollar for oil trade as the dollar fell 40% between 2002 and 2008: inflation surged in the Middle East, food prices soared, and food riots broke out in some countries. Cost-push inflation in the US worked its way from energy prices into food and other goods until the crash mid-2008. In a hyperinflation, that cost-push inflation process becomes extreme; as the dollar weakens, oil prices rise, and countries using the dollar for trade settlement are forced to drop it and use an alternative currency or their own, as Russia did. The process of de-pegging from the dollar and dropping the dollar for trade will reduce global demand for dollars and weaken the dollar further, leading to more inflation for countries that continue to use the dollar for trade. In Part Two, we talk about this process in our description of ten hyperinflation processes that are common to all hyperinflation episodes and a few that are unique to the US dollar as a reserve currency.

The Hyperinflation Case: Too dark for us?

Maybe we simply lack imagination, but we have had a hard time accepting the above dire scenario for the US. If it happens we're all going to need more than a few bottles of whiskey to get through it. It means the end of the US as we know it, both the society and the nation's international standing.

Partly our optimism is due to the fact that only a few of the IMF’s hyperinflation preconditions are present for the US, and because the US political system, for all of its flaws, is more likely to lead to policy interventions before a period of high inflation develops into a true hyperinflation spiral; as in 1980, the US government can move to restore the nominal anchor for the dollar: sound fiscal and monetary management.

On the other hand, our current bind is unique. Federal and state governments have depended heavily on capital gains taxes from asset price inflation in the FIRE Economy (http://www.fireeconomy.com/) since the early 1980s, and selling ever increasing amounts of debt to private and public investors at home and abroad. In the wake of the collapse of the FIRE Economy since mid 2007, as asset prices and incomes fall, Federal receipts are declining along with economic output and GDP, while federal outlays are exploding due to fiscal stimulus programs. By our calculations, if GDP falls only 4% this year while receipts fall 8% -- last year they were supported by a surge in foreign borrowing that grew 6% per quarter -- and outlays increase only by the $790 billion already committed, the fiscal deficit/Real GDP ratio rises well above 5% this year and 10% next. Those are third world fiscal deficit/GDP levels. To prevent this the US needs to cut fiscal outlays, or raise taxes, or both, during a depression when aggregate demand is collapsing due to the loss of purchasing power by households and businesses in the wake of the now collapsing credit bubble.

We can be certain that US politicians are watching as governments around the world fall along with the collapse of national economies:
Latvian PM quits as crisis bites (http://news.bbc.co.uk/2/hi/europe/7901902.stm)
Feb. 19, 2009 (BBC)

Latvian Prime Minister Ivars Godmanis and his government have resigned, amid political turmoil triggered by the Baltic state's economic crisis.
Latvia and Iceland the leading edge of a series of government resignations. Can the UK and Japanese governments be far behind?

While the deflation spiral case can be dismissed as irrelevant in our post gold standard world (see The truth about deflation (http://www.itulip.com/forums/showthread.php?p=57193#post57193)), we cannot accept as an article of faith that the American political system will necessarily allow the US government to "do the right thing" to avoid taking the current inflation path to its logical conclusion. Political pressure to try to preserve the system in the short term at the expense of the long run is too great.

We do not conclude our review of the hyperinflation scenario based on the IMF’s narrow survey and self-serving conclusions. With nose held and peeking between two fingers of our hands plastered to our faces in horror at the implications, we take a serious look at the hyperinflation case. We studied dozens of high inflations and hyperinflations, ancient and modern, and have come to our own conclusions that we believe are more broadly applicable, even to the US case, and more politically independent than the IMF’s.

The most relevant and worrisome factor is that the US is heading into an economic depression in a marginalized fiscal position, and with heavy external debts – even if they are denominated in dollars -- as well as large gross public debt, and heavy household and corporate debt burdens, as output and GDP declines. The combined negative infuence of these pre-conditions may outweigh the unique advantages that the US has over countries that have suffered hyperinflation: the status of the dollar as a reserve currency and the interests of US trade partners to cooperate with the US and each other to avoid taking losses in the purchasing power of the dollar-denominated assets they hold. To answer how these conflicting factors may work out over time we break down the macro-process of hyperinflation into its various interacting sub-processes and build our case bottom-up.

Hyperinflation case revisited - Part Two: How Hyperinflation Happens (http://itulip.com/forums/showthread.php?t=8157) ($ubscription)

Moderate inflation need not develop into a high inflation and then into a hyperinflation. At any point, any government can take steps to end an inflation; the question is, at what political cost? Depending on how far the inflation process has developed, and how much political trouble the government is in, ending inflation can be accomplished by a combination of two steps: one, pegging the currency to a nominal anchor, such as another more stable currency or to a fixed asset, such as land or gold, and, two, addressing the primary cause of all hyperinflations: fiscal mismanagement. In addition to the currency losing its nominal moorings and loss of fiscal discipline, the third root cause of hyperinflation is foreign debt, but this may be wiped out by the inflation itself even before hyperinflation sets in. more... ($ubscription) (http://itulip.com/forums/showthread.php?p=77737#post77737)

See also:

The truth about deflation (http://www.itulip.com/forums/showthread.php?p=57193#post57193)
Deflationistas, inflationistas, and hyperinflationistas (http://itulip.com/forums/showthread.php?p=72798#post72798)
Fed cuts dollar, Fire sales vs FIRE sales, Duh-flation, and Bezzle shrinks again (http://www.itulip.com/forums/showthread.php?p=66592#post66592)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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cjppjc
02-19-09, 08:41 PM
Before we go further, let’s be clear about what a hyperinflation really means in practical, every day terms.


Imagine taking every long term contract in your file cabinet – your mortgage, auto loan, student loan, insurance policy, health care insurance, and so on – and ripping them up. There is no insurance or credit in a hyperinflation. All transactions are cash or barter.
Imagine an ongoing public panic into non-paper assets. In the early stages of a hyperinflation, the most efficient inflation hedges, due to their compact size and liquidity –- precious metals -- disappear in a few weeks. At extremes of hyperinflation, over 1000% per year, hoarding becomes absurd, with items of seemingly little value used as stores of value, such as copper plumbing fittings and brass doorknobs. Anything made of copper, brass, lead, aluminum that is not either nailed down or guarded is stolen and used as a substitute for cash.
Imagine society breaking down. Money based relationships disintegrate. As the purchasing power of everyone’s savings is gone, everyone becomes completely dependent for cash for day-to-day survival from income earned from whatever they can do or sell. Employers index salaries to inflation, but as the economy will have come to a standstill and output has collapsed, the unemployment rate will exceed 50%. Without tax revenue, state and local governments are crippled, and the police are as desperate as everyone else. Crime flourishes. (A friend recently back from Argentina told me that he was repeatedly stopped by police on the street and asked for money.)

Something to look forward to.

Question; In a world dominated by fiat paper. What becomes the new reserve currency?

FRED
02-19-09, 08:43 PM
Before we go further, let’s be clear about what a hyperinflation really means in practical, every day terms.


Imagine taking every long term contract in your file cabinet – your mortgage, auto loan, student loan, insurance policy, health care insurance, and so on – and ripping them up. There is no insurance or credit in a hyperinflation. All transactions are cash or barter.
Imagine an ongoing public panic into non-paper assets. In the early stages of a hyperinflation, the most efficient inflation hedges, due to their compact size and liquidity –- precious metals -- disappear in a few weeks. At extremes of hyperinflation, over 1000% per year, hoarding becomes absurd, with items of seemingly little value used as stores of value, such as copper plumbing fittings and brass doorknobs. Anything made of copper, brass, lead, aluminum that is not either nailed down or guarded is stolen and used as a substitute for cash.
Imagine society breaking down. Money based relationships disintegrate. As the purchasing power of everyone’s savings is gone, everyone becomes completely dependent for cash for day-to-day survival from income earned from whatever they can do or sell. Employers index salaries to inflation, but as the economy will have come to a standstill and output has collapsed, the unemployment rate will exceed 50%. Without tax revenue, state and local governments are crippled, and the police are as desperate as everyone else. Crime flourishes. (A friend recently back from Argentina told me that he was repeatedly stopped by police on the street and asked for money.)

Something to look forward to.

Question; In a world dominated by fiat paper. What becomes the new reserve currency?

At least temporarily: the http://fourthcurrency.com

cjppjc
02-19-09, 08:45 PM
I'm so not happy:(

BadJuju
02-19-09, 09:19 PM
I'm so not happy:(

What's wrong? :(

cjppjc
02-19-09, 09:26 PM
I am unable to prepare myself sufficiently and I worry for my Son.

BadJuju
02-19-09, 09:32 PM
I am unable to prepare myself sufficiently and I worry for my Son.

What do you think you need to do to prepare, sir?

cjppjc
02-19-09, 09:37 PM
I own some precious metal stocks. But I only own a small amount of silver coins.

BadJuju
02-19-09, 09:38 PM
I own some precious metal stocks. But I only own a small amount of silver coins.

Hey, bud, I only own about 40 oz of silver and 1 oz of gold. That is all I am doing, except stocking up on food and stuff like that. :) Do not feel bad!

chrisk
02-19-09, 09:45 PM
Sound economic, fiscal, and monetary management is the nominal anchor for the US dollar.

Obama, Geithner, and Bernanke are on a raft in the middle of the ocean. Geithner says "We need an anchor, bad. Bernanke, trade me your life vest for this trillion dollar bill." Obama says "Are you nuts? That vest looks nothing like an anchor." Bernanke says "Ah, but once we get it on the ocean floor, no one will see it anyway."

cjppjc
02-19-09, 09:55 PM
Hey, bud, I only own about 40 oz of silver and 1 oz of gold. That is all I am doing, except stocking up on food and stuff like that. :) Do not feel bad!

I think WE should be stocking up on more silver coins. Mine are so under water it's tough to pull the trigger again.

World Traveler
02-19-09, 09:55 PM
"Note: The question of monetary anchor in a dollar hyperinflation is interesting because the dollar has itself has for decades acted as a monetary anchor for nations experiencing hyperinflation. Recall a brief period when the dollar declined to 40% against the euro and street vendors in Vietnam, for example, stopped accepting dollars. If the dollar is a monetary anchor, then what is the dollar’s monetary anchor? It is nothing more than the faith that the US government will take the necessary steps to halt inflation should it arise, as in the early 1980s when fiscal austerity put the US economy into two wrenching recessions that brought inflation down from double digits to zero. Sound economic, fiscal, and monetary management is the nominal anchor for the US dollar."

I spent 16 days in Morocco in November and 10 days in Costa Rica in December. In Morocco, both the stores and the street vendors would not accept dollars ever. They wanted euros or Moroccan currency. In Costa Rica, both dollars and the local currency were accepted.

Morocco was a surprise to me. Prior to that, my experience had been that dollars were always accepted. And prior to 2003 or so, they were even sought out and highly valued during my travels.

LargoWinch
02-19-09, 09:56 PM
I'm so not happy:(

cjppjc; remember hyperinflation is as much of a menace as it is an opportunity...

audrey_girl
02-19-09, 11:13 PM
cjppjc; remember hyperinflation is as much of a menace as it is an opportunity...

agreed - also remember what EJ once wrote - that how a person comes out of this mess will be mostly determined by how he/she was prepared for it going into it (if I may paraphrase EJ)

another thing you may want to consider besides food and water storage is arming yourself, getting a gun and learning how to use it responsible for self defense for you and your family.

for food and water consider how the mormons prepare:

http://lds.about.com/od/preparednessfoodstorage/Food_Storage_and_Emergency_Preparedness.htm

they have got this down cold

erw698
02-19-09, 11:19 PM
Sound economic, fiscal, and monetary management is the nominal anchor for the US dollar


I think I'm getting seasick:(

gwynedd1
02-19-09, 11:43 PM
I tend to think hyperinflation typically happens when productive capacity is destroyed. Hyperinflation in Germany did not coincidently happen soon after a war. Zimbabwe eliminated their farming class. So I tend to see hyperinflation as an end game. I do not think it is initiated by monetary policy but only in a desperate attempt to buy what isn't there.

metalman
02-20-09, 12:03 AM
I tend to think hyperinflation typically happens when productive capacity is destroyed. Hyperinflation in Germany did not coincidently happen soon after a war. Zimbabwe eliminated their farming class. So I tend to see hyperinflation as an end game. I do not think it is initiated by monetary policy but only in a desperate attempt to buy what isn't there.

read this paper referenced in part 2...

Inflation and Hyperinflation in the 20th Century: Causes and Patterns (http://www.itulip.com/Select/hyperinflation.pdf) (pdf), Amadou Dem, Gabriela Mihailovici, and Hui Gao, Columbia School of International and Public Affairs, 2001:

nice rundown previous hyperinflation episodes... eg.

II. B] - Hyperinflation in early this Century

˙ The Aftermath of WW I : Austria, Germany, Hungary, Poland, Russia

In the aftermath of World War I, five countries in Central Europe and Asia fell into the grips of hyperinflation, Austria, Germany, Hungary, Poland and the Soviet Union. All these hyperinflations occurred in a relatively short period of time, from 1921 to 1924, and all emerged

in the chaotic conditions that followed the end of World War I.

1. Austria & Hungary

Austria and Hungary were carved out of the collapsed Hapsburg Empire at the end of World War

I. Both countries lost much of their traditional land, while at the same time they were required to

absorb the large bureaucracy of the former Empire. As loser of World War I, in the 1920s, these

two countries also faced the grim prospects of reparation payments to the victorious allied

powers, as set in the treaties of Trianon and Versailles. In Austria and Hungary, the reparation

obligations were feared to be large, the mere fact that the Reparation Commission had a major,

albeit unknown, claim on the assets of both governments cast a significant shadow over public

finances in the two countries. Under a fiat regime, the value of the currency ultimately rests on

the ability of the government to keep its budget under control not only in the present but also in

the future. Furthermore, as two of the most conspicuously weak governments after World War I,

Austria and Hungary were both new states, significant doubts existed inside and outside these

countries about their future viability.

In addition, the Austrian government was burdened by the need to make large transfer payments

to the unemployed. The Hungarian authorities extended great amounts of highly subsidized

credits to the private sector. Thus public budgets were under very heavy strains in both countries.

Eventually, these strains erupted as hyperinflations.


8
3. Germany

Germany was not a new state, although the prewar regime was crushed. A new and fragile

democracy, known as the Weimar Republic, was established, and the new regime was

immediately buried under the burdens resulting from the war. With the huge reparations imposed

by the Treaty of Versailles, the new state began with a crushing fiscal burden, the staggering

value of the reparation payments that the country sent abroad was the central element of public

finance from 1919 to 1923, while Germany was ruled by an inexperienced socialist government

that could not pass a much needed tax reform. In 1922 and 1923, Germany experienced several

armed uprisings and important breakdowns of public order. The situation worsened enormously

in 1923 when the French occupied the area of the Ruhr, the industrial heartland of the country.

The Germans responded to the occupation with passive resistance and widespread labor strikes.

The government paid the strikers by taking loans from the Reichsbank (as the German central

bank at that time). Finally, a hyperinflation exploded. In a period of 15 months, prices rose by

about 1 trillion percent. At its highest, the monthly inflation rate topped 30,000 percent!

4. Poland

Poland suffered substantial social and political turmoil when the end of World War I brought not

peace but a continuing confrontation with Russia that only ended in 1920.

Poland was also a new state. After the partitions of Poland at the end of the eighteen century, its

pieces had been absorbed in the Hapsburg, Russian, and German empires, and Poland was re-

created out of these pieces at the end of World War I. Poland suffered not only the birth pains of

a new and fragile country patched together at the end of the war, it also bore the heavy costs of a

war with the Soviet Union that lasted until late in 1920. Furthermore, the new state of Poland

after World War I was left with an inexperienced civil administration after many of its prewar

civil authorities left the country. Under these circumstances, Poland has run into a hyperinflation

during 1922 – early 1924.

5. Russia

The Soviet Union was created in the most chaotic circumstances of all the new states founded

after World War I. This country was established through a violent revolution and civil war that followed upon Russia’s costly participation in the War. The hyperinflation erupted as a result of

monetary chaos in the wake of both economic devastation and the civil war.

˙ The Aftermath of World War II: China, Hungary, and Greece

The next round of hyperinflations occurred in the wake of World War II, when three widely

separated countries, China, Greece, and Hungary, slid into monetary chaos. The same internally

unstable conditions can be found in two of the three countries undergoing hyperinflation in the

late 1940s. China and Greece were experiencing civil war, although this was not the case in

Hungary.

1. China/Taiwan

After nearly a decade of war with the Japanese, in 1945 China fell into a civil war between the

Nationalist faction under Chiang Kai-shek and the Communist under Mao Tse-Tung. The heavy

strain on the budget during the war became even more intense under the internal confrontation,

and hyperinflation ensued. An interesting aspect of China at that time was the proliferation of

currencies. There were several different currencies circulating in different areas controlled

separately by Nationalist government and the Communist. Between 1947 and 1949, there were

several separate hyperinflations in different currencies going on in parallel in China. After the

Nationalist faction retreated to Taiwan in 1949, inflation came down from its astronomical levels,

but still remained high for some time.

2. Greece

A civil war also followed World War II in Greece. The Germans occupied the country from 1940

to 1944 and placed severe demands on the government, which were met increasingly by printing

money. When the Germans were driven out by the British in 1944, a civil war exploded between

the two main resistance groups: the monarchists and the communists, while noncommunists

controlled the civil administration. Hyperinflation erupted in the midst of the civil war.

3. Hungary

Hungary’s hyperinflation during 1945-1946 is remarkable in two ways. First, it is the only

country to have experienced two hyperinflations in the short period of 20 years. Second, it is the

highest hyperinflation in world history. Prices rose an astonishing 3.8 octrillion times (3.8 ∞

1027) in a mere one year, and the average monthly inflation rate was 19, 800 percent. Hungary,

which in the early 1940s allied itself with the Axis powers, had been an important battleground,

and it lost an estimated 40% of its physical capital. As a loser of the war, it had to pay staggering

reparations to the Allies, especially to the Soviets. After World War II, Hungary was another

case of large effective reparations and occupation payments contributing to a fiscal crisis. It is

calculated that reparation and occupation costs (payments to the occupying Soviet army)

represented 25% to 50% of government spending in 1945 – 1946. One further explanation of

Hungary’s extraordinary inflation rate was its widespread use of indexed deposits and later of

indexed currency. This practice shrank the demand for nonindexed money, which was the base

of the inflation tax, and thus collecting a given amount of revenue required increasing inflation

rates.

Hungary also fits the model of a weak government. Although the ruling party, the Smallholders,

was elected with 60 percent of the vote in 1945, the country’s sovereignty was severely

compromised by the Allied Control Commission, led by the Soviet Union. When the central

bank attempted to put the brakes on monetary emission, for example, the Commission refused to

allow it.

etc/////

ASH
02-20-09, 01:50 AM
What's wrong? :(


I am unable to prepare myself sufficiently and I worry for my Son.

I'm there with you cjppjc -- but ain't nobody "sufficiently prepared" if we end up in a hyperinflationary depression. Frankly, if the economy collapses, the best strategy is that proposed by Mr. Miyagi (or Lukester) -- "No be there." Moving to a country with a functional economy is always going to be safer than sticking it out in a country experiencing hyperinflation, no matter how elaborately prepared your bunker is, or how deep you bury your gold. ... But in a world convulsed in economic turmoil, where is security to be found? If you don't feel adequately prepared for the collapse of the national economy, you've got a lot of company. Anyway, even those with lifepreservers will be required to share, as EJ says, when the Titanic sinks -- so there's a limit to how much of an advantage you could preserve, even if you had more resources.

But take heart! I don't think EJ intended this article as license for iTulip readers to despair. In the first place, just because a worst case scenario is admitted to be possible doesn't mean it is a forgone conclusion. Hyperinflation doesn't have to happen. Second, it sounds like the onset of hyperinflation caused by monetization won't be sudden -- not like a currency event, such as EJ's POOM. That means if we really are headed into the icy water, we'll have a bit of time to scurry around on the deck first, after we hit the iceburg. May as well postpone our angst until then.

metalman
02-20-09, 02:09 AM
I'm there with you cjppjc -- but ain't nobody "sufficiently prepared" if we end up in a hyperinflationary depression. Frankly, if the economy collapses, the best strategy is that proposed by Mr. Miyagi (or Lukester) -- "No be there." Moving to a country with a functional economy is always going to be safer than sticking it out in a country experiencing hyperinflation, no matter how elaborately prepared your bunker is, or how deep you bury your gold. ... But in a world convulsed in economic turmoil, where is security to be found? If you don't feel adequately prepared for the collapse of the national economy, you've got a lot of company. Anyway, even those with lifepreservers will be required to share, as EJ says, when the Titanic sinks -- so there's a limit to how much of an advantage you could preserve, even if you had more resources.

But take heart! I don't think EJ intended this article as license for iTulip readers to despair. In the first place, just because a worst case scenario is admitted to be possible doesn't mean it is a forgone conclusion. Hyperinflation doesn't have to happen. Second, it sounds like the onset of hyperinflation caused by monetization won't be sudden -- not like a currency event, such as EJ's POOM. That means if we really are headed into the icy water, we'll have a bit of time to scurry around on the deck first, after we hit the iceburg. May as well postpone our angst until then.

ej is exploring the possibility of hyperinflation after dismissing it for 10 yrs... makes the point that the gov't can get off the inflation track today if it so chose to! so we watch the 10 pre-conditions... if they get worse, the risk is higher, if better the risk is lower.

the other way to read this is... if the gov't stops this fiscal/banking system corrruption/debt nonsense and gets its shit together, it's time to sell gold and get bullish on the economy again.

that said, if the gov't starts to monetize debt... surely that will precipitate poom.

bpr
02-20-09, 04:05 AM
Employers index salaries to inflation, but as the economy will have come to a standstill and output has collapsed, the unemployment rate will exceed 50%.

This is something I don't get, and I've heard it echoed elsewhere.

How will salaries (notoriously "sticky," as I've also heard elsewhere) be indexed to inflation, even as unemployment soars?

Also in this context, what is inflation? I can't imagine it being the CPI, but possibly the PPI, but likely neither. It is unlikely to mirror "real" shadowstats/grocery store inflation.

My concern is possibly unjustified, since I work for a very small exporter of services, but I assume that this kind of indexing only happens with new job creation, not with job retention (eg, existing employees get the same 2010 wages, maybe a 3% increase, while new employees get the new 2011 wages, indexed to profits/costs).

I just dont get how macroeconimic phenomena like inflation leaks down (avoiding the T word) to the micro worker.

Maybe a fellow Ituliper can lay this out for me.

Thanks for the wake up call. I've been expecting it.

junkacc
02-20-09, 07:04 AM
Salaries will lag considerably to inflation when hyperinflation starts. By the time hyperinflation is in full swing, it will not be about buying a mcmansion but buying the basic nessecities.

If my salary is not inflation indexed ie) will not buy me a loaf of bread by the time I get my next pay check, its not worth my time to work. My time would be better spent stealing and pillaging.

Chris
02-20-09, 08:14 AM
EJ, is the probability high for a hyperinflation in the UK?

we_are_toast
02-20-09, 08:27 AM
So our choice is massive depression or Hyperinflation, or both?!:mad:

Ok, I'm an idealist and believe that grassroots campaigns can work. I'm not willing to simply sit back and watch this happen. The iTulip community is pretty sophisticated and I'm sure participates in many other places on the internet and may even have some influence.

A while ago I argued on another thread that I wasn't interested in proposed solutions by iTulip, I only wanted analysis of solutions that will be implemented. But this apocalyptic forecast has changed my mind. What good is my subscription to iTulip if we have a complete break down of our social infrastructure?

Now I want to see a proposed solution that will prevent this from happening, so I can at least try to promote it on other places on the internet. Come on FRED, EJ, what SHOULD the government be doing to get us out of this mess? Let's see a proposal, all in one article!

Sorry for the frustration, but this article is saying; we are toast!

flintlock
02-20-09, 08:53 AM
If government fiscal responsibility is key to avoiding hyperinflation then I'd say hyperinflation is a forgone conclusion. I just don't see it as being politically feasible.

Quincy K
02-20-09, 09:33 AM
for most countries, I believe that the debt levels are already past the Rubicon and there is no way they can be inflated away. since the G-7 is all that really matters and we all suffer the same debt issues and most will eventually succumb to GD2, why not roll out a new global currency backed by some trivial amount of gold(10 percent)? we fuc*ed up, we're sorry and we won't ever allow it to happen again. by the way, thanks for playing. the dollar, euro, yen, ruble and renminbi are all revalued into a new world currency, debt is monetized and we start the game(Ponzi) all over again. obviously, this scenario is too early but one that may be implemented once the U.S. believes that they will no longer have Reserve Currency status(prior to outright currency collapse).

who says we must all(g-7 countries) suffer through another GD when we can clear the game board and start over?

I mean, have global debt conditions EVER been this bad before?

bpr
02-20-09, 11:02 AM
So our choice is massive depression or Hyperinflation, or both?!:mad:

Ok, I'm an idealist and believe that grassroots campaigns can work. I'm not willing to simply sit back and watch this happen. The iTulip community is pretty sophisticated and I'm sure participates in many other places on the internet and may even have some influence.

A while ago I argued on another thread that I wasn't interested in proposed solutions by iTulip, I only wanted analysis of solutions that will be implemented. But this apocalyptic forecast has changed my mind. What good is my subscription to iTulip if we have a complete break down of our social infrastructure?

Now I want to see a proposed solution that will prevent this from happening, so I can at least try to promote it on other places on the internet. Come on FRED, EJ, what SHOULD the government be doing to get us out of this mess? Let's see a proposal, all in one article!

Sorry for the frustration, but this article is saying; we are toast!

EJ lays it out, but I don't get the US example he uses:


ending inflation can be accomplished by a combination of two steps: one, pegging the currency to a nominal anchor, such as another more stable currency or to a fixed asset, such as land or gold, and, two, addressing the primary cause of all hyperinflations: fiscal mismanagement.

OK, so these two conditions will avoid a hyperinflation.


the US government will take the necessary steps to halt inflation should it arise, as in the early 1980s when fiscal austerity put the US economy into two wrenching recessions that brought inflation down from double digits to zero. Sound economic, fiscal, and monetary management is the nominal anchor for the US dollar.

Okay, the fiscal mismanagement was dealt with by Volcker's ratcheting up interest rates, right? But what about step one? Was the dollar pegged to anything in the early 80s? Is "sound fiscal and monetary management" an appropriate fiat for a "fixed asset", as called for in the first quote?

Someone help me out here.

gwynedd1
02-20-09, 11:32 AM
read this paper referenced in part 2...

Inflation and Hyperinflation in the 20th Century: Causes and Patterns (http://www.itulip.com/Select/hyperinflation.pdf) (pdf), Amadou Dem, Gabriela Mihailovici, and Hui Gao, Columbia School of International and Public Affairs, 2001:

nice rundown previous hyperinflation episodes... eg.

II. B] - Hyperinflation in early this Century

˙ The Aftermath of WW I : Austria, Germany, Hungary, Poland, Russia

In the aftermath of World War I, five countries in Central Europe and Asia fell into the grips of hyperinflation, Austria, Germany, Hungary, Poland and the Soviet Union. All these hyperinflations occurred in a relatively short period of time, from 1921 to 1924, and all emerged

in the chaotic conditions that followed the end of World War I.

1. Austria & Hungary

Austria and Hungary were carved out of the collapsed Hapsburg Empire at the end of World War

I. Both countries lost much of their traditional land, while at the same time they were required to

absorb the large bureaucracy of the former Empire. As loser of World War I, in the 1920s, these

two countries also faced the grim prospects of reparation payments to the victorious allied

powers, as set in the treaties of Trianon and Versailles. In Austria and Hungary, the reparation

obligations were feared to be large, the mere fact that the Reparation Commission had a major,

albeit unknown, claim on the assets of both governments cast a significant shadow over public

finances in the two countries. Under a fiat regime, the value of the currency ultimately rests on

the ability of the government to keep its budget under control not only in the present but also in

the future. Furthermore, as two of the most conspicuously weak governments after World War I,

Austria and Hungary were both new states, significant doubts existed inside and outside these

countries about their future viability.

In addition, the Austrian government was burdened by the need to make large transfer payments

to the unemployed. The Hungarian authorities extended great amounts of highly subsidized

credits to the private sector. Thus public budgets were under very heavy strains in both countries.

Eventually, these strains erupted as hyperinflations.


8
3. Germany

Germany was not a new state, although the prewar regime was crushed. A new and fragile

democracy, known as the Weimar Republic, was established, and the new regime was

immediately buried under the burdens resulting from the war. With the huge reparations imposed

by the Treaty of Versailles, the new state began with a crushing fiscal burden, the staggering

value of the reparation payments that the country sent abroad was the central element of public

finance from 1919 to 1923, while Germany was ruled by an inexperienced socialist government

that could not pass a much needed tax reform. In 1922 and 1923, Germany experienced several

armed uprisings and important breakdowns of public order. The situation worsened enormously

in 1923 when the French occupied the area of the Ruhr, the industrial heartland of the country.

The Germans responded to the occupation with passive resistance and widespread labor strikes.

The government paid the strikers by taking loans from the Reichsbank (as the German central

bank at that time). Finally, a hyperinflation exploded. In a period of 15 months, prices rose by

about 1 trillion percent. At its highest, the monthly inflation rate topped 30,000 percent!

4. Poland

Poland suffered substantial social and political turmoil when the end of World War I brought not

peace but a continuing confrontation with Russia that only ended in 1920.

Poland was also a new state. After the partitions of Poland at the end of the eighteen century, its

pieces had been absorbed in the Hapsburg, Russian, and German empires, and Poland was re-

created out of these pieces at the end of World War I. Poland suffered not only the birth pains of

a new and fragile country patched together at the end of the war, it also bore the heavy costs of a

war with the Soviet Union that lasted until late in 1920. Furthermore, the new state of Poland

after World War I was left with an inexperienced civil administration after many of its prewar

civil authorities left the country. Under these circumstances, Poland has run into a hyperinflation

during 1922 – early 1924.

5. Russia

The Soviet Union was created in the most chaotic circumstances of all the new states founded

after World War I. This country was established through a violent revolution and civil war that followed upon Russia’s costly participation in the War. The hyperinflation erupted as a result of

monetary chaos in the wake of both economic devastation and the civil war.

˙ The Aftermath of World War II: China, Hungary, and Greece

The next round of hyperinflations occurred in the wake of World War II, when three widely

separated countries, China, Greece, and Hungary, slid into monetary chaos. The same internally

unstable conditions can be found in two of the three countries undergoing hyperinflation in the

late 1940s. China and Greece were experiencing civil war, although this was not the case in

Hungary.

1. China/Taiwan

After nearly a decade of war with the Japanese, in 1945 China fell into a civil war between the

Nationalist faction under Chiang Kai-shek and the Communist under Mao Tse-Tung. The heavy

strain on the budget during the war became even more intense under the internal confrontation,

and hyperinflation ensued. An interesting aspect of China at that time was the proliferation of

currencies. There were several different currencies circulating in different areas controlled

separately by Nationalist government and the Communist. Between 1947 and 1949, there were

several separate hyperinflations in different currencies going on in parallel in China. After the

Nationalist faction retreated to Taiwan in 1949, inflation came down from its astronomical levels,

but still remained high for some time.

2. Greece

A civil war also followed World War II in Greece. The Germans occupied the country from 1940

to 1944 and placed severe demands on the government, which were met increasingly by printing

money. When the Germans were driven out by the British in 1944, a civil war exploded between

the two main resistance groups: the monarchists and the communists, while noncommunists

controlled the civil administration. Hyperinflation erupted in the midst of the civil war.

3. Hungary

Hungary’s hyperinflation during 1945-1946 is remarkable in two ways. First, it is the only

country to have experienced two hyperinflations in the short period of 20 years. Second, it is the

highest hyperinflation in world history. Prices rose an astonishing 3.8 octrillion times (3.8 ∞

1027) in a mere one year, and the average monthly inflation rate was 19, 800 percent. Hungary,

which in the early 1940s allied itself with the Axis powers, had been an important battleground,

and it lost an estimated 40% of its physical capital. As a loser of the war, it had to pay staggering

reparations to the Allies, especially to the Soviets. After World War II, Hungary was another

case of large effective reparations and occupation payments contributing to a fiscal crisis. It is

calculated that reparation and occupation costs (payments to the occupying Soviet army)

represented 25% to 50% of government spending in 1945 – 1946. One further explanation of

Hungary’s extraordinary inflation rate was its widespread use of indexed deposits and later of

indexed currency. This practice shrank the demand for nonindexed money, which was the base

of the inflation tax, and thus collecting a given amount of revenue required increasing inflation

rates.

Hungary also fits the model of a weak government. Although the ruling party, the Smallholders,

was elected with 60 percent of the vote in 1945, the country’s sovereignty was severely

compromised by the Allied Control Commission, led by the Soviet Union. When the central

bank attempted to put the brakes on monetary emission, for example, the Commission refused to

allow it.

etc/////

Hi metalman,

Great post. Weak government is certainly a good predictor of capital deterioration. The role of government is to keep order. The productive capacity of a country depends on its ability to organize capital to productive capacity. When the authority of government is not there it cannot organize.

The Confederacy was an interesting case of a government's authority while under duress and the effect on its currency.

http://www.bivouacbooks.com/bbv5i2s1.htm

don
02-20-09, 02:04 PM
Hyperinflation site if it should come:

http://lds.about.com/od/preparednessfoodstorage/Food_Storage_and_Emergency_Preparedness.htm

Their reasons may be a bit outside your worldview but they've been getting this down for a long time...the storage bit :)

don
02-20-09, 02:19 PM
On the other hand, maybe we're selling the Feds short.

Bernanke's helicopter after what were thought to be merely symbolic budget cuts:



http://graphics8.nytimes.com/images/2009/02/17/magazine/22cranes-600.jpg

Guinnesstime
02-20-09, 02:31 PM
Don't know about you guys, but have I been prepping foodstuffs and talking to people from harder times for advice. I also plan to do a little brewing and distilling to use as a liquid currency when paper = poo poo.
Its always good be prepared for anything even if anything is nothing at all.

labasta
02-20-09, 04:20 PM
I tend to think hyperinflation typically happens when productive capacity is destroyed. Hyperinflation in Germany did not coincidently happen soon after a war. Zimbabwe eliminated their farming class. So I tend to see hyperinflation as an end game. I do not think it is initiated by monetary policy but only in a desperate attempt to buy what isn't there.

I'd go one step further and say that it is the way the government acts to the dilemma of income (productive capacity) being less than expenditure (usually debt burden).

One thing kept coming up in the examples given in that great PFD from Columbia University: inexperienced government. They made the wrong decision.

It seems that sometimes a country does not have the power to reduce the debt burden, e.g. war reparations. Weimar's hyperinflation sounds suspiciously like the whole country went on strike to put two fingers up at the French.

Sometimes, a country has a choice to reduce it's expenditure, but it is politically untenable, e.g. Hungary's massive unemployment payments.


Does the US have an inexperienced or cowardly government?
Is the power of the banks over the governments of the world strong enough to make the reduction in debt politically impossible?
If the government is free from the FIRE, do they have the backbone to reduce the expenditure (debt) in some way?

Just a few quick thoughts.

ACW
02-20-09, 05:25 PM
All you guys are smarter than me. That I am sure of.

However, to a simpleton like me, flipping the switch from inflation to hyperinflation is all a matter of confidence.

If I wig out and decide to empty the isles at the grocery store. Do that for a few weeks. The neighborhood starts talking about the store always been out of stuff....and they start hoarding...well you get the picture.

Hyperinflation imo will start in a manner like I described above. We wont hear about it on the evening news, CNBC or even here that hyperinflation has begun until We all individually act in a manner like I have described above.

cjppjc
02-20-09, 05:41 PM
Does the US have an inexperienced or cowardly government?
Is the power of the banks over the governments of the world strong enough to make the reduction in debt politically impossible?
If the government is free from the FIRE, do they have the backbone to reduce the expenditure (debt) in some way?


Yes.
Yes.
No.

ecortes
02-21-09, 10:08 PM
Jim Sinclair rests his hyperinflation case on cost-push inflation from a collapsing dollar resulting from capital fight. We don’t see it; the US will shut it down.

How would this be impossed and for how long could they be maintained?

ecortes
02-21-09, 10:31 PM
I think that it is to early to answer that. The last similar transfer of power was from the UK to the US, that one took from the end of WWI to the end of WWII to complete. However at the beginning the US was not ready just like China is not right now.

FRED
02-21-09, 10:34 PM
How would this be impossed and for how long could they be maintained?

Imposition of taxes is the usual method.

For example:

Problem: Capital flight into gold
Government response: Tax gold sales at 80%
See: US exchange rate and capital controls or bust? (http://www.itulip.com/forums/showthread.php?p=49722#post49722)

ecortes
02-21-09, 10:49 PM
So these would be directed at Americans? Would'nt that accelarate the sales of $US by foreigners and a decline of the $US?

FRED
02-22-09, 12:10 AM
So these would be directed at Americans? Would'nt that accelarate the sales of $US by foreigners and a decline of the $US?

The way capital controls work is to place penalties on capital moving in one direction, benefits in the other. For example:

Attracting Foreign Investment, Sony (http://www.sony.net/Fun/SH/1-12/h3.html)

Japan's economic depression was rooted in the interest equalization tax instituted in July 1963 by the President of the United States John F. Kennedy... At the time, the American economy was in recession, resulting in a tremendous outflow of domestic capital. To slow this trend, Kennedy took strong measures -- a 16.5% interest equalization tax on all capital leaving the U.S. While this move did indeed decrease the outward flow of American capital, it also incited panic in world markets. Japan was no exception. In 1965, Japan felt the full effects of the tax -- the securities market slumped into the worst depression in its history. When the Tokyo Stock Exchange average dropped to 1,020 yen, many thought that the Japanese economy would collapse.
See: Beware Relief Rallies Update 1: DJIA 7552 the bottom? (http://www.itulip.com/forums/showthread.php?p=62889#post62889)

metalman
02-22-09, 08:28 PM
Our contacts tell us that South Korea, Malaysia, Indonesia, and other Asian nations that have built substantial currency reserves since the 1997 to 1998 crisis do not intend to follow the IMF plan and allow their currencies and economies to be wrecked, again. They are aware that their reserves make them targets for speculators. To our knowledge, all of them plan to immediately impose capital controls to thwart any future attack on their currencies.

Asia Agrees on $120 Billion Currency Pool as Crisis Worsens (http://www.bloomberg.com/apps/news?pid=20601087&sid=abzdHM_2dVMo&refer=home)

By Shamim Adam and Seyoon Kim
Feb. 23 (Bloomberg) -- Asian nations will form a $120 billion pool of foreign-exchange reserves that can be used by countries to defend their currencies in an expansion of efforts to battle fallout from the global financial crisis.
Finance ministers from Japan, China, South Korea and 10 Southeast Asian nations agreed to the fund at a summit yesterday in Phuket, Thailand. The amount is 50 percent more than was proposed last May, and a broadening of the current arrangement called the Chiang Mai Initiative that allows only bilateral currency swaps. No date was set for completion of the new pool.
A regional currency agreement is vital “in ensuring market confidence in the Asian economies,” Thailand Finance Minister Korn Chatikavanij (http://search.bloomberg.com/search?q=Korn+Chatikavanij&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) told reporters. “It is one of our highest priorities.”

ecortes
02-23-09, 04:33 PM
But at the time the bulk of the fixed income and currency assets were in the US, and today they reside outside. As a result I find it hard to understand why Erik thinks that the US$ would stay strong if the the money is already outside of the US, unless of course they supported it by printing money; might succeed short term but for how long?

flintlock
02-27-09, 12:37 PM
All you guys are smarter than me. That I am sure of.

However, to a simpleton like me, flipping the switch from inflation to hyperinflation is all a matter of confidence.

If I wig out and decide to empty the isles at the grocery store. Do that for a few weeks. The neighborhood starts talking about the store always been out of stuff....and they start hoarding...well you get the picture.

Hyperinflation imo will start in a manner like I described above. We wont hear about it on the evening news, CNBC or even here that hyperinflation has begun until We all individually act in a manner like I have described above.

We saw a taste of this last fall when the SE United States got hit by gas shortages due to the Hurricane. At first there were just longer lines as some stations ran out of gas. Then you started seeing people with extra gas cans filling up. Then you saw people stopping to fill up any time they passed an open station, whether they needed to or not. The herd mentality took over quickly, and for several days, you could just barely get any gasoline. It became a real interruption to normal business.

Definitely something I see happening in this case.