I find it interesting that many people seem to think that our nation is heading for major inflation at the very least – and hyperinflation in all probabilities. They like to toss out other countries that have experienced severe hyperinflation, such as the Weimar Republic of Germany, Zimbabwe, and Argentina, to name but a few.
When asked why we’re headed for hyperinflation the typical response is that the Fed, in conjunction with the US government, is printing trillions of dollars, which can only serve to dilute our “worthless” currency to great magnitudes and cause prices to increase in a parabolic way. We’re also told that the US government will soon be spending the entire Federal budget just to pay interest on the outstanding debt.
These are all very interesting points, but they must be measured against historical reality. We have episodes of hyperinflationary periods that we can study, and make appropriate conclusions. What are the common characteristics of hyperinflation?
1) All countries that have suffered hyperinflation in modern history have had the problem of owing massive amounts of debt denominated in a currency which is not their own. Let’s take the Weimar Republic of Germany as an example.
The German Deutschmark was a stable currency following World War I. There was just one slight “problem” that they had – they lost the war. The Treaty of Versailles specifically stated that Germany was to issue war reparations in the currencies of the Allies instead of their own. What did this mean?
National debt is a promise of the future labor of a country’s population. A nation’s “money” is the claims on a nation’s debt, from the Federal level clear down to personal loans. What is so unique about this? What if I was to offer you $20 of my debt, and you claimed it by giving me a $20 bill in return. Further, let’s assume that I refused to pay you back. What are you going to do, shoot me? No, you would promptly be arrested and thrown behind bars. Your only recourse, other than forgiveness of debt to a brother, is to appeal to the civil magistrate and hopefully have them require me to pay you back.
This is different than not paying back debt to the government. The government IS the civil magistrate. They have the ability to collect by the point of a sword. They can fine you, imprison you, garnish your wages, and generally make your life really, really miserable.
What happens when a nation now owes debt denominated in a foreign currency – such as the position of the Weimar Republic? They can no longer bring the point of a sword to bear in collecting money (claims on the promise of a foreign country’s future labor). They can’t arbitrarily increase the money supply of a different country and claim ownership of it.
2) Investors shun the debt of a country that has too much debt denominated in a foreign currency. Investors aren’t stupid – well, at least some of them. They are always looking for the best return on their money, given their particular level of risk aversion. A nation’s treasury bonds are always appealing, since investors know that a country will bring the sword to bear in order to collect money from their population and pay it to the bearer of the bonds. That’s why treasury bonds are considered “safer” than non-government bonds.
Investors knew that the Weimar Republic had to pay off a very large amount of foreign currency denominated debt. This made the Deutschmark undesirable, since investors began chasing those other foreign securities.
What happens when a nation can no longer sell its debt? How does it raise the money to buy foreign currency in order to meet its debt obligations? It has only one choice. It debases the existing currency of the nation. It might do this by dictating that “all $10 bills are now worth $100”. It may even reach the point where the original $10 becomes worth $10 million.
3) The population of a country will seek to spend its currency as fast as possible when experiencing hyperinflation. A $10 bill on one day might be able to purchase 20 times as many goods and/or services as that same $10 bill the following day. Currency becomes the “hot potato”. Nobody trusts it, and nobody wants to hold onto it for more than an hour at a time.
4) Hyperinflation doesn’t really solve the problem of paying back foreign denominated debt. The rapid increase in Germany’s money supply caused their currency to be greatly devalued against other currencies around the world. This means it now took even more German Deutschmarks to purchase (repay) a certain amount of war reparations.
What do we know about the currency of the United States?
1) All of the debt that the US owes is denominated in the US Dollar. Our nation owes no money denominated in a foreign currency. Therefore, the need to devalue our currency to the level of hyperinflation doesn’t exist – and won’t exist.
2) Investors are running to purchase US Treasury securities. We are typically seeing “bid-to-cover” ratios of 2.5 to 3.5 during Treasury auctions. This means there are 2 ½ to 3 ½ times as many bidders as there are Treasury securities available for purchase.
Treasury yields (interest rates) are dependent on the demand for a particular security. If the demand is very high then interest rates will drop – because the seller does not need to tempt the buyers with as much future interest. If the demand is extremely low then interest rates will rise quickly. This is due to the seller needing to entice the buyers with a higher payout at security maturity.
3) The population of the US is hoarding US dollars right now – as is much of the world. They are being treated as valuable holdings, instead of “hot potatoes”. Merchants are having a difficult time “encouraging” buyers to part with their dollars. Consumers are striving to pay down debt and build a little cash nest-egg if at all possible.
4) The US government has absolutely no power to devalue the US dollar directly. Its only ability is to issue new credit (Treasury securities) that is claims on the future labor of its people.
Our government is currently struggling to spend as much currency (received by selling its debt) as it possibly can, in an effort to mask the deflationary depression that is already upon our nation.
Think about it for a moment. The Federal government has run $1.6 TRILLION budget deficits each of the past two years. Our nation’s annual GDP is stated to be around $14 trillion. This means that our government is falsely propping up the economy by more than 10% each year (approximately 11.4%). This is a level of deflation that compares quite equally with what was seen during the years of the Great Depression – yet the populace doesn’t understand this.
Hyperinflation is not around the corner. Hyperinflation is not even a distant concern. Instead, the masses are being incorrectly led to believe that this is our greatest cause for concern. It makes us hate our Federal government even more – while the FACT that the international banks are the primary culprit goes largely unnoticed.
I have been a registered Republican for most of my adult life, and believe strongly that the sphere of the civil magistrate needs to be squarely centered on the fear of God. We have some good Christian men who are about to be elected on November 2nd. It seems that almost all of them seek to have a balanced budget Constitutional Amendment.
A debt-based economy needs a moderate amount of inflation each year just to survive. What if these well-meaning Republican get their wish and are able to reduce our nation’s budget deficit to zero?
The “everything is slowly getting better” mask will be quickly removed from before our nation’s eyes. We will see the deflationary depression released like a lion from its cage.
Our nation desperately needs to remove itself from debt-based money, and begin having the US Treasury issue our currency. This would be a giant step towards having a biblically-based currency that is centered on completed labor. This is what those seeking to heal our economy should be focused upon.