–What causes hyper-inflation? Weimar Republic, Zimbabwe, Argentina, Venezuela

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Twitter: @rodgermitchell; Search #monetarysovereignty
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If I had a dollar for every time I am told America is about to experience hyper-inflation (given with the examples of Weimar Republic, Zimbabwe, Argentina and Venezuela) I might be able to give Bill Gates a “run for his money.”

O.K., not really, but it does become tiresome. So perhaps I can put a small dent in the Henny-Penny, sky-is-falling, phony hysteria, by providing a short, simple explanation of what causes  inflations.

Let’s begin with the absolute basics: All money is a form of debt. There is no money that is not debt. When you own a dollar, you own a debt of the United States government. That dollar bill in your wallet is a Federal Reserve Note. The words “bill” and “note” signify debt.

The value of any debt is based, in part, on the value of its collateral. When you take out a mortgage, the bank evaluates the property and the full faith and credit of the mortgagee. Together, they comprise the collateral for the loan.

The collateral for a debt/dollar also is “full faith and credit” — the full faith and credit of the U.S. federal government. This may sound nebulous to some, but it actually involves certain, specific and valuable guarantees, among which are:
1. The government will accept U.S. currency in payment of debts to the government
2. It unfailingly will pay all it’s dollar debts with U.S. dollars and will not default
3. It will force all your domestic creditors to accept U.S. dollars, if you offer it, to satisfy your debt.
4. It will not require domestic creditors to accept any other money
5. It will take action to protect the value of the dollar.
6. It will maintain a market for U.S. currency
7. It will continue to use U.S. currency and will not change to another currency.
8. All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa.

If any of the elements of full faith and credit were to change, and the value of the federal government’s full faith and credit were to decline, the value of the debt/dollar would decline, i.e. we’d have inflation. If the full faith an credit declined enough, we’d have hyper-inflation.

Every hyperinflation in history has been caused, not by excessive “money printing,” as is widely and falsely believed, but rather by two events: 

  1. A change in the full faith and credit of the sovereign currency issuer
  2. A shortage of a critical commodity, usually food, energy, or labor.

Inflation never is caused by increases in the money supply. It always is caused by a change in full faith and credit, or by the supply of a critical commodity.

Each of the title-mentioned nations experienced a political problem, not a “too-much-money” problem, that caused their extreme inflations. In fact, it was the inflations that caused the “too-much-currency” to be created and not the other way around.

Whenever you hear of a nation experiencing hyperinflation, remember that the problem was not caused by excessive spending, but by a reduction in that nation’s full faith and credit and/or supply of critical goods and services.

For the United States, about the only thing that could cause the first hyperinflation in our existence, would be if a reckless fool like Ted Cruz, John Cornyn or some other Tea Party nut, prevented the paying of federal debts (as repeatedly the nuts have threatened to do).

That would cause an extreme change in item #2 of full faith and credit (above), which would debase the value of the U.S. debt/dollar. And we’d have hyper-inflation.

So don’t worry about a “government-‘printing’-too-much-money” inflation; worry about a Cruz/Corwin/Tea Party hyperinflation.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually. 
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

Published by Rodger Malcolm Mitchell

MBA Northwestern, business turnaround expert, economist

Published

25 thoughts on “–What causes hyper-inflation? Weimar Republic, Zimbabwe, Argentina, Venezuela”

    1. I agree that the problem is definition. If inflation is not a general rise in prices, then what IS a general rise in prices.

      They are confusing what they (wrongly) believe is a cause (increase in the money supply) with the effect (inflation).

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  2. and one must acknowledge the “strategic venezuelan plan”, an agreement between the united states and ex-prez uribe of colombia, among others, to destablize venezuela’s currency/govt because of it’s socialist tendencies. a clear example of reducing a country’s full faith and credit. an additional benefit, for the 1%, is the neverending war against govts that work for the masses.

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  3. I saw a couple of stories related to Monetary Sovereignty today:

    The first is about a couple who found $10M in gold coins. The US Govt is confiscating the money because the money was stolen from the mint over 100 years ago. I find it funny that the US Govt needs the money back.

    http://gma.yahoo.com/10m-gold-coin-hoard-found-yard-may-stolen-141317823–abc-news-personal-finance.html

    The second is how Russia is going to crash the US Economy by selling all their dollars. Someone out there will argue that if Russia and China sold all of their dollars, it would weaken the dollar so much it would cause hyperinflation. It wouldn’t, but if the countries spent the dollars it might create a few jobs.

    http://news.yahoo.com/russia-warns-could-reduce-zero-economic-dependency-us-083926261.html

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  4. RMM says: “Whenever you hear of a nation experiencing hyper-inflation, remember that the problem was not caused by excessive spending, but by a reduction in that nation’s full faith and credit.”

    Bullseye. Many different things can cause a reduction in the full faith and credit (war, natural disasters, societal collapse, etc), but they all amount to society thinking their money is no good. They lose faith in their money, which itself loses “credit” (i.e. credibility).

    A government can try to compensate by “printing” more money, but this is an effect, not a cause. The actual cause of hyper-inflation is a reduction in the full faith and credit. This always comes first. “Money printing” always comes second. It is an effect; a consequence. Hyper-inflation simply means printing more money in response to a reduction in the full faith and credit.

    Most people think the reverse is true. They conflate cause with effect. They think that “printing” more money causes hyper-inflation.

    They are brainwashed to think this, since it lets the rich justify austerity, which in turn increases inequality (i.e. widens the gap between the rich and the rest).

    Rodger may disagree with me in this, but I say that hyper-inflation (a reduction in the full faith and credit) is different from inflation (a general rise in prices). There can be inflation with no loss in the full faith and credit. However, since most people do not understand the difference between the two, and since most people conflate cause with effect, we get erroneous statements like this from the Ludwig von Mises Institute (one of the many propaganda mills funded by the rich to promote inequality):

    “The essence of inflation is not a general rise in prices as such, but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services.”

    This statement makes two errors. In wrongly equates inflation with hyper-inflation, and it posits “money printing” as a cause, not an effect.

    Consider Venezuela, which has very high inflation (56% per year) despite having no significant increase in its supply of money, and no loss in the full faith and credit.

    Venezuela has high inflation because rich elitists are deliberately causing shortages in consumer goods. It is a war of attrition against the Venezuelan government and economy. The artificial shortages cause hoarding, speculation, and inflation (i.e. high prices), which in turn cause crime, corruption, privation, and widespread misery. The elitist goal is to turn the masses against the populist government so that the rich can replace it with a plutocracy. When Venezuela once again becomes a pure plutocracy, like it was before 1999, then Venezuela will rejoin the “international community,” of plutocracies. Almost all nations today are plutocracies.

    The Venezuelan government, being Monetarily Sovereign, could create more money, but this is dangerous when there are material shortages. It could change inflation (high prices) into hyper-inflation (a loss of full faith and credit of the sovereign currency creator).

    At the moment, there are disturbances in Venezuela, but these are mainly in the affluent areas of cities, and are caused by rich students of universities, and by small breakaway factions of the elitists who were inspired by the US-sponsored disturbances in Ukraine. They are led by one Leopoldo Lopez, who is now in jail facing charges of inciting riots. Although Mr. Lopez was groomed and educated in the USA (including Harvard University) he has led the disturbances on his own. The USA does not favor his approach, since it mainly hurts the affluent areas, and it unifies the lower classes against the USA and against rich Venezuelans. Instead, the USA favors patience, and the economic war of attrition (i.e. engineered shortages and inflation) led by Henrique Capriles Radonski and his business allies.

    Of course, you won’t hear any of this in the corporate media outlets, which are all owned by the rich. They want you to think that the cause of Venezuela’s inflation is the government’s social programs. They want you to think that the cause of any social problem anywhere is any form of narrowing of the gap between the rich and the rest. That includes deficit spending.

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    1. I am trying to get my mind around this. It seems to me in a sense MMT ignores the issue that money to have value it must be tied to real economic activity. Sure the government can print money, but if the underlying economic assumptions remain the same, aren’t you diluting the value of the money that already exists? It appears to be yet another scheme to redistribute wealth.

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  5. “Each of the title-mentioned nations experienced a political problem, not a “too-much-money” problem, that caused their extreme inflations. In fact, it was the inflations that caused the “too-much-money” to be created and not the other way around.”

    So politics conspired to shrink supply of goods and services causing the government to print more money?

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  6. The lessons of History are neither learned or acknowledged by the majority of persons; especially in this “great” nation where the majority refuse to learn it and are not encouraged to know it. Therefore only the few understand the true reasons behind the hyper-inflationary events that have transpired to this point in time. One must understand the terms imposed upon Germany post WWI to comprehend Weimer hyperinflation. One must understand the effects which independence had upon the agricultural sector in Zimbabwe/Rhodesia in order to understand Zimbabwe’s hyperinflation. Understanding such is a reach for populations still debating and insisting upon creationism’s relevance.

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  7. “For the United States, about the only thing that could cause the first hyper-inflation in our existence, would be if a reckless fool like Ted Cruz, John Cornyn or some other Tea Party nut, prevented the paying of federal debts (as repeatedly the nuts have threatened to do). That would cause an extreme change in item #2 of full faith and credit (above), which would debase the value of the U.S. debt/dollar. And we’d have hyper-inflation.”

    @RMM: Just one quibble with this post: Can the dollar really be “debased”?

    See:

    http://mikenormaneconomics.blogspot.com/2012/04/often-repeated-bs-line-that-fed-is.html

    http://mikenormaneconomics.blogspot.com/2011/07/lets-end-money-printing-dollar-debasing.html

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  9. Off topic but worth mentioning. Bernacke receives first payment for doing the bidding of the .1%. 250,000 from Dubai. Job well done

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  10. @RMM: I just received your book: “Free Money”, and thanks for writing it. On page 201, you mention that you wrote another book: “Getting Rich is the Sweetest Revenge” which deals with building a business. Is this book available anywhere? It is not available on Amazon apparently.

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  11. OFF TOPIC

    José Manuel Barroso (President of the European Commission) is one of Europe’s strongest defenders of the euro and austerity. Today he announced a $15 billion loan to Ukraine so that the government can pay off private bondholders. The debt will be dumped on the Ukrainian masses in the form of brutal austerity. There will also be mass deregulation and privatization.

    Also today, Mr. Barroso gave a speech at the University College Cork in Ireland, which is supposedly one of the best universities in the world. Afterward he was bestowed with an honorary doctorate in economics.

    This is his twenty-second honorary doctorate. Mr. Barroso never earned a Ph.D. the regular way, but he didn’t need to. Anybody can be successful in today’s world if he dedicates himself to widening the gap between the rich and the rest.

    So tell me again, folks, why there is “no evidence” that the 1% pay pundits, professors, and politicians to promote austerity and inequality.

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    1. I wonder about that too.

      Why do sovereign developing countries with their own sovereign currencies have to borrow in dollars to finance their national projects or, in this case with Ukraine, to pay off private bondholders?

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  12. Zen,

    The currency of many Monetarily Sovereign nations is backed by a full faith and credit that is not widely trusted. Creditors to these nations may insist on payment in dollars or another major currency.

    For example, you yourself could create a Monetarily Sovereign currency. You might call it the “zen.” You would have the unlimited ability to create zens. You might wish to pay your debts in zens, but would your creditors accept zens?

    Most will not.

    So you go to your bank and borrow dollars, with which to pay your bills. Later, you will have to find some way to obtain dollars, to repay the bank. You might do this by net exporting or by further borrowing.

    Bottom line: Monetary Sovereignty is not an absolute. It comes in degrees. Although you made yourself Monetarily Sovereign, your degree of sovereignty would be quite low.

    See: https://mythfighter.com/2013/07/27/i-just-thought-you-should-know-lunch-really-can-be-free/

    Even the U.S. is not 100% Monetarily Sovereign. For instance, our “debt ceiling” laws prohibit money creation beyond certain limits. Congress’s reluctance to raise or eliminate that ceiling was part of the reason why credit agencies (foolishly) downgraded the world’s reserve currency.

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    1. I previously gave an answer to this question, Rodger, but upon reflection I see that my comment had some problems and vagaries. I like your answer much better.

      I interpret it thus…

      The USA and Ukraine both have trade deficits, but the Ukraine’s currency (the hryvnia) is not trusted throughout the world like the US dollar is. Hence foreigners who export to Ukraine do not want to be paid in hryvnias. They want to be paid in dollars, or euros, or some other widely traded currency. For Ukraine to get that currency (let’s say dollars) Ukraine could ask some foreign bank to accept Ukranian hryvnias in exchange for dollars. However the bank will say no. The bank doesn’t want to be stuck with a currency (the hryvnia) that is not widely accepted. Therefore, to pay for those imports, Ukraine must borrow dollars from banks, and borrow dollars from investors in the form of selling bonds.

      The Venezuelan Bolívar is not widely accepted as a common currency. However Venezuela has an overall trade surplus of $8.72 billion per month on average. (In was up to $17 billion in late 2008.) Therefore Venezuela does not have a foreign debt problem.

      So, even if a nation has Monetary Sovereignty, its government can have debt problems if the nation has a large trade deficit, or if its currency is not widely accepted by foreign traders and exporters.

      The USA has the largest trade deficit in the world, but has no foreign debt problem, since the dollar is the most widely accepted currency in the world.

      Note that we’re talking about common currency, not reserve currency. As Rodger has noted in the past, a reserve currency is merely a trading convenience. If the US dollar ceased to be the most widely used reserve currency, then the world would shift to using some other reserve currency, and trade would continue as always. The USA would not be destroyed.

      However, if the US dollar ceased being the most widely used COMMON currency, then the USA would have to correct its trade deficit, or else the USA would be in trouble. The less widely accepted the dollar as a common currency, the more trouble for the USA.

      Canada has a fairly sizeable trade deficit, but Canada does not have a foreign debt problem, since Canadian dollars are widely accepted. Foreigners who export to Canada agree to be paid in Canadian dollars. Then they can go to a bank and exchange those Canadian dollars for some other currency if they wish, or they can buy Canadian T-securities.

      The Australian dollar is widely accepted like the Canadian dollar. Plus, Australia now has a modest but growing trade surplus, because of the rising price of commodities. A nation’s “current account” (i.e. the size of its trade deficit or trade surplus) is measured in money, not in actual units exported. Australia exports metals, coal, oil, and natural gas (plus wool, meat, and wheat). The physical amount of Australian exports has not changed, but their price is up. Therefore Australia has a trade surplus, as measured in US dollars.

      BOTTOM LINE: Ukraine would not have a foreign debt problem if Ukraine had a large trade surplus, or if the Ukrainian hryvnia were widely accepted.

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    2. Thank you both Rodger and quatloosx for your responses. I am starting to understand it better now.

      I get the part about the need of developing countries to replenish their dollar reserves for international trading. What is still unclear is why most of these same developing countries which are nonetheless monetarily sovereign have to also borrow, often from either the IMF or World Bank, to finance the construction of their national infrastructures like highways, bridges, airports, dams, railways. etc. Why don’t they just finance those projects with their own money?

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      1. To the degree they can use domestic labor, they can finance anything. But many smaller nations do not have sufficient domestic expertise for infrastructure building, so must hire foreign companies — who will not accept the local currency.

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        1. Got it. Thanks again Rodger.

          To understand economics, you must understand Monetary Sovereignty. Most economists and politicians don’t.

          I now at least functionally understand MS. I think I’m smarter now than most economists and politicians in the beltway. Yay! It’s a terrific ego-boost but on second thought it’s disheartening that our policy makers and economic advisers in Washington continue to ignore the reality of MS and continue to unnecessarily impose economic difficulties to millions of Americans.

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        2. [1] I had been wondering about the same questions that Zen asked.

          Many thanks to RMM for answering.

          [2] Zen (above) says that understanding MS is an “ego boost,” but it’s also disheartening.

          Yes indeed.

          Mike Norman is an MMT proponent with his own blog. He attacked MMT until he met Warren Mosler, who explained things simply to him. As Mike Norman began to understand, Mr. Mosler told him, “Now, prepare to be unhappy the rest of your life.” Today Mike Norman says, “Boy was Warren correct!” Mike’s revenge against the Big Lie is to seek out trading deals that are influenced by it, and then bet against the herd. He makes money, while herd loses.

          The Big Lie is maintained by all sides. Liberal and conservative, rich and poor, religious and atheistic, black and white, pacifist and warmonger, male and female – almost everyone defends the Big Lie, although each person has his own reason for doing so. The rich do it to widen the gap between themselves and the rest. Their toadies do it so they can have lucrative jobs (e.g. pundits, professors, and politicians). Gold traders and other hucksters do it so they can sell snake oil. Average people do it in order to indulge their hate and their selfishness.

          There are many lies out there, but the Big Lie is especially pernicious. The culture of any society is a mixture of facts and lies. Each of us believes at least some facts and some lies. Your personal selection from the facts and lies will never fully match my selection. Thus, we agree on some things, and disagree on others. If you don’t believe the same lies I do, then I may call you stupid, insane, or evil. I may fight you, and make war on you if our lies don’t match.

          The basic principles of Monetary Sovereignty are not lies. They are facts.

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        3. Zen – it should be emphasized that poorer countries DON’T have to borrow dollars abroad. The better way is to get dollars by selling exports, and have the government direct them to needed infrastructure using imported machinery say. It is almost always a terrible idea to borrow dollars from foreign banks or the IMF etc – which is why the rich countries are always pushing poor countries to do it. The countries are usually better off just doing without whatever stuff foreign “experts” say they must buy, avoiding debt and relying on themselves. If they can do the latter, they tend to become middle income and then rich countries soon enough. Foreign-denominated debt, which usually ultimately goes to luxury spending for a corrupt domestic elite, is what keeps countries poor.

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