U.S. Monetary and Fiscal Policy Excesses Have Spiked Hyperinflation Risks.
Hyperinflations of the last century, as seen in the German Weimar Republic and Zimbabwe, for example, most commonly developed under circumstances of extreme money supply creation in the context of collapsed or collapsing economic activity. That said, recent extremes in aggressive Federal Reserve monetary easing and U.S. Government deficit spending, directed at ameliorating a Pandemic-driven economic collapse and related financial-system turmoil, also have begun to boost domestic inflation meaningfully.
Measured by the Consumer and Producer Price Indices, and by the Implicit Price Deflator for the Gross Domestic Product, monthly, quarterly and annual U.S. inflation rates have surged in the last several months to record or multi-decade highs. That inflation is not just gasoline prices. “Core” inflation, net of food and energy, is showing a similar surge. Given the underlying unusual, unstable and evolving extreme circumstances, risk of hyperinflation continues to mount. These comments focus first on elements of that hyperinflation risk, then examine the nature of two historical inflations and finally review actions that mitigate personal financial risk.
THE OUTLOOK FOR THE U.S. DOLLAR INFLATION CONTINUES TO DARKEN
In response to the Pandemic-driven economic collapse, the U.S. Federal Reserve spiked its money supply creation. Against February 2020 pre-Pandemic trough levels, Currency plus Demand Deposits—the most-liquid elements of Money Supply M1—jumped by an unprecedented 74% through March 2021, with the broader Money Supply M2 up by an historic 29% in the same period. FOMC projections show continued easings through 2023. On the fiscal-policy front, quarter-end First-Quarter 2021 U.S. Treasury Debt of $28.2 Trillion was at 128% of the $22.0 trillion GDP, a ratio unprecedented outside of the Pandemic-driven collapse. Separately, the U.S. Government’s Fiscal-Year End September 30, 2020 Financial Statements showed a record negative net worth of $113.8 trillion, incorporating a 2020 operating deficit “Net Position,” of $26.8 trillion, plus deepening unfunded Social Security and Medicare liabilities of $87.0 trillion.
HYPERINFLATION IN THE GERMAN WEIMAR REPUBLIC AND ZIMBABWE
Two examples of hyperinflation are touched upon here; there are a number of other examples. Noted in earlier economic writings on ShadowStats.com, the German Weimar Republic inflation of the early 1920s is close enough to unfolding circumstances in the United States to provide cautions as to the potential scope of runaway inflation. Some material here reflects those earlier writings. Post-World War I Germany was financially and economically depleted as the penalty for losing the war. Indeed, in the wake of its defeat in the Great War, Germany was forced to make debilitating reparations to the victors, particularly France.
Reviewed in Ralph Foster’s masterpiece on Fiat Paper Money: “By late 1922, the German government could no longer afford to make reparations payments. Indignant, the French invaded the Ruhr Valley to take over the production of iron and coal (commodities used for reparations). In response, the German government encouraged its workers to go on strike. An additional issue of paper money was authorised to sustain the economy during the crisis. Sensing trouble, foreign investors abruptly withdrew their investments. During the first few months of 1923, prices climbed astronomically higher, with no end in sight...The nation was effectively shut down by currency collapse. Mailing a letter in late 1923 cost 21.5 billion marks.”
The worthless paper German mark became useful as wallpaper and toilet paper, as well as for stoking fires. As was seen in Germany, the normal flow of commerce in the United States also likely would shut down, initially, in a hyperinflation, although black markets most likely would evolve rapidly.
Foster closed the preface to his remarkable book with a particularly poignant quote from a 1993 interview of Friedrich Kessler (1901-1998), a law professor whose university affiliations included, among others, Yale and the University of California Berkeley. From firsthand experience, Kessler described the Weimar Republic hyperinflation. “It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money.”
Anecdotes I picked up from individuals who lived through the Weimar inflation—as to the pace of the hyperinflation—involved eating and drinking. At one point in the crisis, someone planning lunch in a restaurant commonly would negotiate a price and pay in advance for the meal, since the price otherwise would be higher after lunch. Another person could have an expensive bottle of wine with dinner. By the next morning, the empty wine bottle would be worth more as scrap glass than it was the night before as an unopened bottle of fine wine.
As circumstances deteriorated, with no useful currency, canned goods became items of barter. One friend recalled his father had traded a shirt for a can of food. Rather than trade the can of food further, the father brought it home for dinner. The food in the can had gone bad.
ZIMBABWE HYPERINFLATION WAS A QUADRILLION TIMES WORSE THAN IT WAS IN WEIMAR GERMANY
Zimbabwe went through a number of years of high inflation, with an accelerating hyperinflation from 2006 to 2009, when the currency was abandoned. Through three devaluations, excess zeros repeatedly were lopped off notes as high as 100 trillion Zimbabwe Dollars. The cumulative devaluation of the Zimbabwe Dollar was such that a stack of 100,000,000,000,000,000,000,000,000 (26 zeros) two dollar bills (if they were printed) in the peak hyperinflation would have been needed to equal in value what a single original Zimbabwe two-dollar bill of 1978 had been worth. Such a pile of bills literally would be light years high, stretching from the Earth to the Andromeda Galaxy.
What helped the evolution of Zimbabwe monetary excesses over several years, while still allowing some semblance of economic activity, was the backup of a well-functioning black market in U.S. Dollars. Someone holding Zimbabwe Dollars would look to stabilise the purchasing power of the currency in hand, exchanging it as soon as possible for U.S. Dollars in that black market. U.S. Dollars acted as a hard asset, like gold, as a store of wealth for the holders of Zimbabwe Dollars, permitting more-orderly purchases of food, etc.
At present, the United States has no backup system, with implications for a more rapid and disruptive hyperinflation, should it hit. With no backstop to the continuously depreciating U.S. Dollar, domestic commerce quickly would cease. While a barter system/black market likely would evolve, such could require some time to operate smoothly.
In early 2009, the governor of the Zimbabwe Reserve Bank suggested his actions in printing money were vindicated by then-recent extreme actions by the Federal Reserve boosting its Monetary Base to save a collapsing U.S. banking system. If the U.S. went through a hyperinflation like Zimbabwe’s, total current U.S. Federal Debt and obligations in excess of $100 trillion (including unfunded liabilities such as Medicare) could be paid off for much less than a current U.S. penny. Zimbabwe paper currency became worthless. A restroom facility at a South African border station famously posted a placard: “Toilet Paper Only...No ZIM Dollars.”
SALVAGING THE U.S. DOLLAR POST-HYPERINFLATION
Continuing “salvage” of the U.S. financial system eventually should lead to efforts reviving a fully debased U.S. currency, from some form of a hyperinflationary depression. “Saving” of the U.S. Dollar at that time, likely would reflect a rebasing of the Dollar, along with other currencies, within the context of a new Gold Standard, backed by sovereign holdings of gold. The United States remains the largest sovereign holder of physical gold. The implication here for current investors, otherwise, is to hold both physical gold and silver as investments, a hedge against price inflation and currency debasement, to preserve the purchasing power of one’s U.S. Dollar based assets.
SURGING GOLD PRICES TEND TO SIGNAL ACCELERATING INFLATION
Gold remains the primary store of wealth, and holding physical gold should tend to maintain the purchasing power of one’s assets and income. Historically, gold often has been the currency, and it has maintained its purchasing power over millennia. The same amount of gold that bought a loaf of bread in Ancient Rome, would buy a loaf of bread today. As frequently discussed here, the price of gold tends to follow and often anticipates underlying actual inflation. EG