Here’s a great article from Minyanville’s Kevin Depew on the Potential for a hyper-inflationary scenario, versus our present deflationary trajectory. A lot of people are spending a lot of time thinking these scenarios through, but Kevin’s brief OpEd cuts to the heart of the matter; that Treasury and the FED have unequivocally declared war against deflation with the implicit corollary thesis that inflation is vastly preferable. My opinion? Sure it is! …to those with huge debt loads and no capital, like the FED and our government!
One the most remarkable things to me is how the American people have been sold on accepting, even preferring, inflation over deflation. It is truly amazing that government and central banking bureaucrats could successfully instill the belief that lower prices for assets are bad. The reality is that lower prices are only bad for artificially-constructed economies.
Deflation is necessary to restore market and economic stability. It is not without pain. But inflation, even mild inflation, is like an intoxicant that slowly destroys the body over time even as its narcotic properties mask the pain. By comparison, hyperinflation is ruinous. How ruinous? Consider this passage from Adam Fergusson’s book, “When Money Dies: The nightmare of the Weimar collapse”:
“In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.”
Update, related (see the end of the article, Why Not Hyperinflation?): Parents Pull Kids From Day Care and other Deflationary Topics
For a long time in the 80s, I had a job that paid enough to cover the rent and utilities but not quite transportation and basic food. Most of my friends also had similarly paying jobs and living situations. So, we all pooled our money 4 nights a week and bought and cooked together and ate at each other’s apartments in the same apartment building. It was a very nice way to live in those days and I’m grateful we had each other.
You could say that we lived in an inflationary environment: stuff was available for purchase, but we couldn’t afford to buy it. That’s a lot different than having no job and no income which would have been, and still is, so much worse.
I’ll take inflation any time, just gotta used to pot luck again.
November 10th, 2008 at 11:15 pm
I think that the danger is that while deflation is a painful economic circumstance for many, it is always a temporary one. Eventually, price equilibria are established and the economy begins a recovery. Despite the severity of our Great Depression, the economy emerged from that period and went on to set the bar for a stable and prosperous capitalist system. Hyperinflation OTOH, as history shows us, always leads to currency crisis and ultimately sovereign default.
To the extent that the current FED attempts to reflate the bubble result in a manageable rate of inflation, like the US saw in the 1970s and 80s, then we can all get along like you say. However, the US carries a much larger debt burden now (federal and individual) and the economy is so much smoke and mirrors, since our real industry is a shadow of its former self. I can’t profess to know how serious any hyperinflationary risk is at this time, but we are certainly closer to it than ever before.
The real problem, I think, is that the solution is clearly deflationary, the unwind of unmanagable debt loads and unrealistic asset price bubbles in housing and elsewhere will inevitably take place. But because of our status as a net debtor nation with a large fiscal deficit, we cannot actually persue a strategy of a managed unwind (e.g. disclosure of the insolvent institutions, bankruptcy and debt forgiveness).
As a nation we are in a bind, and the FED’s only viable strategy is inflationary, which in essence is a tax on US citizens through currency devaluation. Obvious moral hazard aside, I just can’t follow that line of thinking to a conclusion that actually fixes the current predicament. No matter how much money the Treasury and the FED pump into the economy, we the people don’t seem capable of increasing our debt load much farther.
November 11th, 2008 at 6:17 am