"But Then Finally The Masses Wake Up"

The average, middle-income American has probably never heard of hyperinflation. Some may have read about the great hyperinflations that took place recently in Zimbabwe and almost a century ago in Weimar Germany. What sticks in the mind is the absurdity of it all. 

In Zimbabwe, for instance, the government of Robert Mugabe printed the first $100-trillion dollar note! In Weimar Germany by "late 1923, the German government required 1,783 printing presses, running around the clock, to print money!" Stories of pathetic Weimar Germans pushing wheelbarrows full of money to the grocery store to pay for a loaf of bread are common on the internet.


Not to worry, though. It could never happen here. Right?

That's what Matthew O'Brien thinks. He writes about economics in The Atlantic. On March 21, 2012 his magazine published an article entitled: "The Hyperinflation Hype: Why the U.S. Can Never Be Weimar." O'Brien is a Keynesian, or some modern variety of 17th century mercantilist. He believes that there is not enough money in the world. In his article he makes some counter-intuitive, mind-blowing points, like:

Right now getting the markets to buy our debt isn't the problem. Getting enough debt for the markets to buy is the problem.

In a March 3, 2012 article in The Atlantic, entitled "Currency Wars Are Good!", OBrien writes:

A currency war begins, simply enough, when a country decides to push down the value of its currency. This means either printing money or just threatening to print money. A cheaper currency makes exports cheaper, and more competitive exports means more growth and happier people.

And this:

The world needs more money. Currency wars create money. It's time for policymakers to forget the wrong lessons from history, get competitive, and start pushing down their currencies.

This is the pap The Atlantic is feeding its readers. But I'll return to that later. For now let's concentrate on O'Brien and his economics, which is more mysticism and pop psychology than rational argument. James E. Miller, Editor In Chief at the Ludwig von Mises Institute of Canada, recounts Peter Schiff's recent interview with O'Brien. In that interview O'Brien says:

Right now, we need more money, I know it sounds more crazy but right now our economy is way below where it should be based on the long term trend.

The interview is worth reading in its entirety. Schiff, who is a popular Austrian economist and commentator, asks O'Brien some searing questions and receives nothing but mush in response. O'Brien is exposed as a non-thinking parrot of Keynes and Paul Krugman. Consider this exchange from the interview:

Matthew O’ Brien:
No we have a modern economy and we need money in modern economy.
Peter Schiff:
No
Matthew O’ Brien:
If we don’t have an economy, creating money would not do anything.
Peter Schiff:
No, look..
Matthew O’ Brien:
But we have a real economy.
Peter Schiff:
No, no, no. Dumping money on a modern economy is no different than dumping money on a primitive economy. The money itself has no value. It’s just paper. What gives money value is what we produce. And so whether it’s a simple economy or an industrial economy, it’s the production that gives money value and in order that money have value in an economy it has to be scarce. Because all money does is to allow what’s produced to be allocated throughout the economy. So who gets what? So it’s a way to give you what’s been produced. But if you simply add more money, you are not going to add any more production. All you are going to do is make the price of what’s been produced go up and there is no benefit.
Matthew O’ Brien:
No there would definitely be a benefit right now.

Obviously, O'Brien does not believe that the laws of economics are immutable over time. He's a pragmatist in the worst sense of the word. What was true yesterday is not necessarily true today, so let's throw everything against the wall, even irrational and discredited policies from centuries past, and see what sticks today. This is not economics. This is certainly not science. It is mysticism, pure and simple and it corrupts the opinion of so many today who advocate falsified economic theories like socialism and mercantilism.

In a nutshell O'Brien believes that hyperinflation is an impossibility today because Ben Bernanke and his fellow geniuses at the Federal Reserve would not allow it to happen. O'Brien claims that the great hyperinflations of history were caused by "government incompetence." Hyperinflation, he tells us, "typically begins with an economic implosion. War and revolution are the usual suspects -- or, in Zimbabwe's case, an ill-advised land reform." Since America is beset with none of these problems, she has nothing to fear. Besides, Bernanke and company are waiting in the wings to come to the rescue.


O'Brien advises Americans to rest easy.

Whatever money the Fed "prints" is stuck in the banks. That money isn't inflationary as long as the banks don't lend it out. What if the banks do start lending at a faster clip? The Fed can still effectively pay the banks not [to] lend by, for example, raising the interest on excess reserves or require the banks to set aside more money. It would be shocking for the Fed not to pursue one of these options. 

Shocking? Really? Let's accept O'Brien's argument at face value. Are we to believe that the genius Bernanke three times embarked on a policy of creating money by means of quantitative easing knowing full well that the money created must remain "stuck in the banks" or all hell would break loose?

Are you kidding me? And we're supposed to rest easy because if the money created by Bernanke is ever in danger of becoming unstuck in the banks, the Fed could simply pay the banks to keep it stuck?

You can't make this stuff up. It's Alice in Wonderland whistling in the dark.

Here's what a real economist, Ludwig von Mises, has to say about inflation in his great treatise, Human Action [emphasis mine]:

The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.


This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the [p. 428] country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.


But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.


It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.

You will note that Mises says nothing about war, revolution or land reform. The onset of hyperinflation depends upon a single factor: public opinion. Of course, there is another phenomenon that is hyperinflation's necessary prerequisite: money printing.

In his article O'Brien focuses on four great, modern hyperinflations: Hungary in 1945-46, Zimbabwe in 2007-09, Weimar Germany in 1922-23, and Bolivia in 1885-86. He takes pains to analyze what motivated the authorities in these countries to wreak havoc on their currencies. Yet, the facts -- as O'Brien readily admits them -- are these: "Hungary turned to the printing press with such unparalleled gusto..." "Mugabe turned to the printing presses." In Weimar Germany just "about the only people still working were the ones manning the printing presses." And "Bolivia printed money. Lots of it."

Even if O'Brien can't see it, the lesson is crystal clear. Printing money -- "Lots of it" -- is never a good idea, no matter what the motivation.

What is also crystal clear is that hyperinflation in these sorry countries did not take place immediately after the printing presses revved up. Authorities in these countries embarked on a policy of money inflation gradually. The printing presses had been churning out money by the carload for quite some time before the proverbial shit hit the fan. Which begs the question: When does such money printing reach the tipping point?

O'Brien thinks it's when the money becomes unstuck from the banks. Mises knows better. It's when "the masses wake up." It's when public opinion recognizes that monetary inflation is not merely a stopgap measure, but a "deliberate policy" that goes on "endlessly," and that the quantity of money will increase "beyond all bounds." These are concepts that even the genius Bernanke cannot measure and counter. But this is not to say that Bernanke and modern governments are absolutely clueless.      

Central banks today are powerful and resourceful institutions. They are not so foolish and clumsy as to literally print currency as Robert Mugabe did. I would find it shocking if the US Treasury ever circulated a $100-trillion dollar note. There is a reason the US Treasury continues to mint and circulate the all but worthless penny. It perpetuates the myth in the public domain that American currency and coins are inviolable and immutable stores of value.

If O'Brien is right about anything, it is his contention that Bernanke and company at the Fed have plenty of "options" at their disposal. The Fed uses these "options" to delay and mask monetary inflation. For example, the US dollar is the world's reserve currency. Working in concert with the World Bank and foreign central banks, the Fed can manipulate financial markets and world exchange rates...but only to a point. It can stretch out it's manipulations over many, many years...to a point. By means of electronic fund transfer it can avoid the embarrassingly obvious $-trillion dollar banks notes...to a point. It can buy its own debt, pad the books of banks and prolong the inevitable...to a point. However, if monetary inflation becomes a deliberate and endless process, the public will eventually catch on, and when it does all hell will break loose.

No one can predict when finally the masses will wake up. US authorities both inside government and at the Fed do their best to hide their activities and fool the public. They manipulate official government statistics in an attempt to convince the public that inflation is virtually nonexistent. They purposely convolute and contort the country's finances to such an extent they can convince simpletons like Matthew O'Brien that Ben Bernanke is a financial genius. They educate our children in Keynesian myths that hold that persistant monetary inflation is a necessary and proper means of creating a "happier people."

However, try as they might, O'Brien, Bernanke and company cannot forestall the inevitable truth from becoming eventually known. A simple and instant Google search today reveals facts like "$1.00 in 1914 had the same buying power as $22.57 in 2012." Despite their best efforts, the authorities in charge of our money cannot prevent the ordinary American housewife from knowing the true price of a loaf of bread.

"But then finally the masses wake up." The public realizes inflation is a deliberate and endless policy. The crackup boom begins in a flash and ends with you holding the bag.