by Patrick Barron
Hyperinflation leads to the complete
breakdown in the demand for a currency, which means simply that no one wishes
to hold it. Everyone wants to get rid of that kind of
money as fast as possible. Prices, denominated in the hyper-inflated currency,
suddenly and dramatically go through the roof. The most famous examples,
although there are many others, are Germany in the early 1920s and Zimbabwe
just a few years ago. German Reichsmarks and Zim dollars were printed in
million and even trillion unit denominations.
We may scoff at such insanity and assume
that America could never suffer from such an event. We are modern. We know too
much. Our monetary leaders are wise and have
unprecedented power to prevent such an awful outcome.
Think again.
Our monetary leaders do not understand the
true nature of money and banking; thus, theyadvocate monetary expansion as the cure for every economic
ill. The multiple
quantitative easing programs perfectly illustrate this mindset. Furthermore,
our monetary leaders actually advocate a steady increase in the price level,
what is popularly known as inflation. Any perceived reduction in the inflation
rate is seen as a potentially dangerous deflationary trend, which must be
countered by an increase in the money supply, a reduction in interest rates,
and/or quantitative easing. So an increase in inflation will be viewed as
success, which must be built upon to ensure that it continues. This mindset
will prevail even when inflation runs at extremely high rates.
Like previous hyperinflations throughout
time, the actions that produce an American hyperinflation will be seen as necessary, proper, patriotic, and ethical; just as they were seen by the monetary
authorities in Weimar Germany and modern Zimbabwe. Neither
the German nor the Zimbabwean monetary authorities were willing to admit that
there was any alternative to their inflationist policies. The same will happen
in America.
The most likely trigger to hyperinflation
is an increase in prices following a loss of confidence in the dollar overseas
and its repatriation to our shores. Committed to a low interest rate policy, our monetary authorities will
dismiss the only legitimate option to printing more money — allowing interest
rates to rise. Only the noninflationary investment by the public in government
bonds would prevent a rise in the price level, but such an action would trigger
a recession. This necessary and inevitable event will be vehemently opposed by
our government, just as it has been for several years to this date.
Instead, the government will demand and
the Fed will acquiesce in even further expansions to the money supply via
direct purchases of these government bonds, formerly held by our overseas
trading partners. This will produce even higher levels of inflation, of course. Then,
in order to prevent the loss of purchasing power by politically connected
groups, the government will print even more money to fund special payouts to
these groups. For example, government will demand that Social Security
beneficiaries get their automatic increases; likewise for the quarter of the
population getting disability benefits. Military and government employee pay
will be increased. Funding for government cost-plus contracts will ratchet up.
As the dollar drops in value overseas, local purchases by our overextended
military will cost more in dollar terms (as the dollar buys fewer units of the
local currencies), necessitating an emergency increase in funding. Of course,
such action is necessary, proper, patriotic, and ethical.
Other federal employee sectors like air
traffic controllers and the TSA workers will likely threaten to go on strike
and block access to air terminal gates unless they get a pay increase to
restore the purchasing power of their now meager salaries.
State and local governments will also be
under stress to increase the pay of their public safety workers or suffer
strikes which would threaten social chaos. Not having the ability to increase
taxes or print their own money, the federal government will be asked to step in
and print more money to placate the police and firemen. Doing so will be seen
as necessary, proper, patriotic, and ethical.
Each round of money printing eventually
feeds back into the price system, creating demand for another round of money
printing ... and another ... and another, with each successive increase larger
than the previous one, as is the nature of foolishly trying to restore money’s
purchasing power with even more money. The law of diminishing marginal utility applies to money as it does to
all goods and services. The political and social pressure to print more money
to prevent a loss of purchasing power by the politically connected and
government workers will be seen as absolutely necessary, proper, patriotic, and ethical.
Many will not survive. Just as
in Weimar Germany, the elderly who are retired on the fruits of a lifetime of
savings will find themselves impoverished to the point of despair. Suicides
among the elderly will be common. Prostitution will increase, as one’s body
becomes the only saleable resource for many. Guns will disappear from gun
shops, if not through panic buying then by outright theft by armed gangs, many
of whom may be your previously law-abiding neighbors.
Businesses will be vilified for raising
prices. Goods will disappear from the market as
producer revenue lags behind the increase in the cost of replacement resources.
Government’s knee-jerk solution is to impose wage and price controls, which
simply drive the remaining goods and services from the white market to the gangster-controlled
black market. Some will sit out the insanity. Better to build inventory than
sell it at a loss. Better still to close up shop and wait out the insanity. So
government does the necessary, proper, patriotic, and ethical thing: it prints even more money and
prices increase still more.
The money you have become accustomed to
using and saving eventually becomes worthless; it no longer serves as a medium of
exchange. No one will accept it. Yet the government continues to print it in
ever greater quantities and attempts to force the citizens to accept it. Our
military forces overseas cannot purchase food or electrical power with their
now worthless dollars. They become a real danger to the local inhabitants, most
of whom are unarmed. The US takes emergency steps to evacuate dependents back
to the States. It even considers abandoning our bases and equipment and
evacuating our uniformed troops when previously friendly allies turn hostile.
Read more at :
http://mises.org/daily/6617/We-Will-Be-Told-Hyperinflation-is-Necessary-Proper-Patriotic-and-Ethical
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