moneyFYI
Financial Freedom Is Merely Organized Common Sense
Is Hyperinflation In Our Future?
I have noticed considerable interest in inflation. Sometimes there is an interest in “hyper-inflation,” that uncommon but devastating economic chaos that results when fiat money becomes worthless.
Hyperinflation has occurred in our history, and it always ends badly. People rightly fear the risk.
The cause question is not so simple as some would have us believe.
Let’s get past the popular choice of cause.
Printing vast amounts of extra money is not a cause; it is an effect. Author Clint Ballinger points to other reasons, and we can assess how they may be affecting the current inflation problem.
The summary thought
“There are differences in details and emphases, but the basic story of outside coercion…internal corruption…bad policies on banking…etc. are the same in Weimar and Venezuela as in Zimbabwe. As always, the “printing” is the result, not the cause.”
Clint Ballinger. The Myth of Hyperinflation
A more careful analysis could help us understand the facts around what is happening now and what might occur in the future.
The factors that matter
It is easier to believe the printing of money cause because we can imagine how that could stop. Dealing with problems when you have misjudged the reason is futile. Wet roads don’t cause rain, although they are always present when it rains.
Ballinger identifies several causes, and when we see them, we can notice some similarities with our current condition. That will help us to assess reality and decide on our potential action.
The most significant factors are outside and before the printing of money:
- Losing a war
- Civil war
- Internal corruption
- Incompetence resulting from bad economic education
- Incompetence resulting in bad economic and/or banking policy
- Elite minorities clinging to power
- Foreign denominated debt
- Collapse of production
You should recognize that not all occur simultaneously. Some intermediate steps lead to printing money to solve a previously created problem.
Corruption and incompetence
Economies work best when they are ruthlessly objective. When they are manipulated in any way, they become more fragile. Eventually, fragility creates too little output for the inputs used, and chaos soon follows.
We are upset by corruption but seem to forgive incompetence, at least to a point. When the two combine, the problem accelerates.
A ruling elite often covers up their corruption and incompetence with fantasy and delusional thinking.
Flawed theories and harmful policy
Internal corruption leads to other problems that cause inflation to flourish. Economic education becomes self-serving rather than objective. We can see one of them today. Modern Monetary Theory is one such. Its thesis is government spending need not be constrained by the fear of increasing debt to unsustainable levels. Really!!??
Bad economic ideas lead to bad policy.
Eventually, we notice that the ruling elite uses fiction to justify their continuing power.
Foreign currency borrowing
Suppose you have an elite minority operating incompetently or intending to use the economy to serve their personal needs and wants. They will eventually borrow in foreign currencies from foreign lenders.
Why? There is too little available capital in-country (especially if they intend to steal it), so they must reach externally. The foreign lenders are astute and will not accept the local currency to denominate the loan. As time passes, interest payments and eventually the capital must be paid in the foreign currency. To do that requires buying the foreign currency with their local money. They merely print whatever it takes.
Production collapses
Goods and services rely on the economy being rational. If someone cannot tell what they will receive for their efforts, they will be confused and make weak decisions. Weak choices accumulate, and eventually, the businesses will be unable to pay for their materials or people and will go out of business.
As in Venezuela and Zimbabwe, they soon all go out of business.
Then to keep the people from revolting, the ruling elite prints and distributes near useless fiat currency. When the economy collapses, money is not the problem. Having nothing to buy with it is the problem.
The underlying thought
Money is what you trade your goods or services for in a functioning economy. The two work together. You and others produce value and take money for it. You then trade your money for goods and services produced by others. When there is money without an offsetting good or service, chaos follows. You should expect no less.
In our current situation, we have incompetent or delusional people with their hands on the lever that creates money without an offsetting good or service. They want to cling to power because that benefits them somehow or another. Maybe money. Maybe prestige. Maybe ego. Who knows? Or cares, for that matter. It is just a fact.
The bits to take away
Our mission is to correct the illusion. As Ben Shapiro has said, “Reality doesn’t care about my feelings.” When the governing wisdom aims at feelings, it is consequently unreal. Avoiding reality is the biggest mistake you can make as a person, and it is so for a society or economy as well.
Learn to be objective even when it is uncomfortable. Follow up if you have even a twinge of doubt about government policy and action. Learn more. Challenge nonsense.
Beware. Dan Mitchell’s law, “Bad government policy begets more bad government policy.”
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
moneyFYI 