Inflation and hyperinflation

View 750 Monday, November 12, 2012

I have said that the prudent will prepare for inflation; that inflation is taking place now and will continue. I have also said that sometimes inflation has resulted in drastic hyperinflation – Weimar Germany and Brazil in the last quarter of the Twentieth Century are examples — and this is not impossible for the United States.

Not everyone agrees with me. I have this mail:

Hyperinflation requires a wage-price spiral.

Hyperinflation requires a wage-price spiral.

Hyperinflation requires a wage-price spiral.

What I tell you three times is true.

What mechanism in the United States economy translates inflation directly into wage increases?

What evidence is there that wages in the United States are inflating at a rate anywhere close to price inflation?

For full points, discuss the specifics of how Weimar Germany holding debt denominated in foreign currencies had the inflationary effect, and explain how the same effect arises in the United States in spite of the fact that United States debt is nearly all denominated in dollars.

If you are unable to frame a proper answer, post a note admitting that you are a fraud and a liar and should not be talking about things you don’t understand.

PRICE INFLATION IN THE ABSENCE OF WAGE INFLATION IS NOT INFLATION, IT IS AN ECONOMIC FULL STOP.

Either the Fed will figure this out, in which case we get deflation, or it will not, in which case we get Mad Max. Either way, you have no idea what you are talking about and should stop deliberately misleading your readers.

I post this in hopes that someone more articulate will explain it to me. Given its tone I have no real desire to correspond with the writer. Is there some truth in there that I have not seen?

I would think that printing fiat money is the very definition of inflation. When there is a great deal of money chasing finite good – including labor – then prices for the goods will rise, and if there is any shortage of labor, then wages will rise. Indeed, on Sixty Minutes last Sunday (November 11, 2012) there was a segment on the shortage of skilled labor for manufacturing jobs in these times of unemployment, and one suggestion was that wages should rise. Of course that would not instantly create more skilled labor; what it might do is induce more of those retired, or satisfied with an entitlement life, to reenter the labor force; employers are of course competing with entitlements, and after January first when the Affordable Health Care Act takes effect there will be other effects.

Hyperinflation is fairly rare, and lest I have not been clear on the matter, is not inevitable. Not inevitable does not mean zero probability. But ever increasing supplies of money will always have an effect, and increasing supplies of money widely distributed will cause prices to rise. If wages do not rise you can get various forms of stagflation; those old enough will recall Gerry Ford’s Whip Inflation Now efforts, and the increased money supply resulting in the return of stagflation during the Carter era. Under Keynesian theory you can’t have stagflation; but in fact that did happen.

Keynes famously quipped that burying jars of money would create non-government work (digging up the money) and through the release of the money into the economy solve the problems of depression. There was also the Townsend Plan, which in essence advocated large pensions to be paid to nearly everyone over 65. Those interested in the theory of the plan can find Townsend’s original proposals on line; they are quite appealing, and were persuasive to many.

If all this works – if goods are produced and more and more people go to work, then you get a booming economy, and all is well. That was the theory of Stimulus, and the shovel ready jobs as investments in infrastructure. Readers may observe the results of that experiment.

But if there is an increase in money but not in goods, prices will rise, and critical prices – energy being one critical – can rise quite rapidly. This will have an effect on the economy and on investment strategies. There are I suppose a number of outcomes including “an economic full stop” whatever that is, but in the latter half of the Twentieth Century the result was almost always stagflation: rising prices, stagnant wages, and high unemployment. This leads to demands for more ‘safety net’ entitlements. We do not know the final outcome of creating a situation in which fairly large numbers of people live under those circumstances, and many become adjusted to living on the dole as ‘normal’, but we may find out from direct experience.

So. It may be that I simply don’t know what I am talking about, and I am misleading my readers, but I do not do so deliberately. I think I have made a rational analysis of the probable effects of increased entitlements financed by increases in the money supply – pretty well the present US policy – and it seems very reasonable to me that the result will be stagflation: rising prices coupled with high unemployment. The rises in the consumer price index will officially be called “Inflation”, as in Whip Inflation Now, and I believe that prudence demands that we prepare for it.

Inflation always reduces the value of fixed income and cash savings. Those living on savings or fixed annuities should understand that.

The Petraeus affair continues, and becomes stranger; indeed it becomes so strange that it is becoming credible. There may be less to the story than we thought. There remains the story of Benghazi: who knew what, and when? The key decision was to leave the consulate inadequately protected coupled with not having a ready rescue force standing by in case the gamble failed. But I doubt we will learn much from General Petraeus on that.

Way back in the Eisenhower Administration there was a saying, “Deficit financing doesn’t cause inflation, deficit financing IS inflation.” While that is not strictly true – it is possible to have deficits created in non-inflationary ways – it isn’t likely. In general, governments running big deficits are engineering inflation. When more money chases the same goods, prices rise.