Low Hyperinflation Risk For the US?

According to some analysts, the risk of a Zimbabwe like hyperinflation to happen to the US dollar is slim if not implausible. Because the idea is, once 'inflation' gains a footing and eventually overcomes 'deflation' it will be easier to control.

Perhaps. But such is giving too much credit to the ability of authorities to steer us out of trouble.

But before acceding to such premises, it is best that we must try to understand Zimbabwe’s hyperinflation model.

We quoted Albert Makochekanwa of the Department of Economics of the University of Pretoria, South Africa in our Will Debt Deflation Lead To A Deflationary Environment?, who wrote in his paper “Zimbabwe’s Hyperinflation Money Demand Model” the following: ``Borrowing from Keynes (1920) suggestions, namely that ‘even the weakest government can enforce inflation when it can enforce nothing else’; evidence indicates that Zimbabwean government has been good at using the money machine print. Coorey et al (2007:8) point out that ‘Accelerating inflation in Zimbabwe has been fueled by high rates of money growth reflecting rising fiscal and quasi-fiscal deficits’. As a result of that, the very high inflationary trend that the country has been experiencing in the recent years is a direct result of, among other factors, massive money printing to finance government expenditures and government deficits.”

So, exploding DEFICITS…

From caseyresearch

Plus a jump in government payrolls which has surpassed the private sector, which further entrenches government spending...

Source: contraryinvestor.com (Fabius Maximus)

Plus, a soaring growth money supply, which according to Jeff Tucker of Mises.org seems starting to respond…And importantly a snowballing clamor for the printing press:

Previously we posted Ken Rogoff see Kenneth Rogoff: Inflate Our Debts Away!

And now:

From Peter Boone and Simon Johnson (Wall Street Journal Blog)…

``The Fed should announce that it will create inflation in 2009, i.e., it will do whatever it takes to make sure that wages and prices rise, rather than fall, in the next 12 months. And it should back that up with more aggressive monetary expansion, buying even more government and private securities. We cannot wait for a deflationary death spiral to take hold

From the Economic Times…

``There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

And at ZERO interest rates, ``we are entering a world with interest rates that are far too high for the economy's good," Goldman Chief U.S. Economist Jan Hatzius wrote in a Jan. 16 research note.” (Businessweek)

``The solution is obvious: The Fed needs to deliberately raise the rate of inflation—maybe not all the way to 6%, but significantly above zero. One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank.” writes Peter Coy of Businessweek

Essentially Dr. Gideon Gono of Zimbabwe seems to be gaining quite a following among personalities in Wall Street, the academe and in the media...Aside from of course, public authorities like Mervyn King Governor of the Bank of England who will likewise do a Gono.

As for the risk of hyperinflation in the US or elsewhere, I’d rather be guided by Ludwig Von Mises in Human Action p. 427….

``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.”

Video: Inflation=Prosperity???

This video is an example of Keynesian Propaganda aimed at hoodwinking the public of the supposed magic of devaluing a currency (via the printing press) to create prosperity. (Hat Tip iTulip, Lew Rockwell).

Oh, this isn't just a US phenomenon, most politicians and academic experts here are likewise proponents of the devaluation of the Philippine Peso for the alleged benefit of the economy (a.k.a. exports or OFWs).

Meanwhile, the public is unaware that noble sounding projects/programs/policies only benefit the politically connected, government officials and the primary recipients of government inflation. The rest of the public suffers via higher prices.

Zimbabwe’s Gono Lauds US and UK For "Seeing the Light" and "Making Positive Difference"

We frequently cite Zimbabwe because it has been a living example and the epitome of how government policies can, out of political motivations, deliberately cause the destruction of a nation’s currency and its aftereffects to its markets and economy.

Bizarrely, just last April, Dr. G. Gono, Governor of the Reserve Bank of Zimbabwe, or Zimbabwe’s central bank lauded the US and UK in his Zimbabwe’s Monetary Policy Statement (HT: FT Alphaville) for following his footstep.

Quoting Dr. G. Gono (all bold highlights his)

``As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

``That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

``Yet there are telling examples of the path we have taken from key economies around the world. For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.

``A few months ago, the USA economy confronted a severe mortgage crisis, which threatened to spark an economy-wide recession. The USA Central Bank again responded by injecting over US$160 billion between December, 2007 and March, 2008, to provide impetus to the American economy and prevent a worse crisis from happening.

``A look at the recent developments in the UK equally reveals how increasingly, leading central banks in the global economy are bailing out troubled economic sectors to achieve macroeconomic and financial stability.

``Faced with a yawning threat of systemic bank failures on the back of the aftermaths of that country’s mortgage crisis, the Bank of England was directed by its Government to intervene by providing a £50 billion lifeline to the UK’s banking sector.

``Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy [italics-mine] that what’s good for goose is not good for the gander.

``Those who yesterday did not see the interconnection between sanctions and the politics of this country as they sought conventional and dogmatic textbook methods of moving this economy now have good cause to reflect on these examples of quasi-fiscal interventions by the central banks in the USA and the UK and review their dogmas in the interest of adopting more flexible and dynamic approaches [italics mine] informed by the exigencies of the economic situation on the ground.

``Our economy is and has been in trouble for over ten years and our extraordinary interventions by whatever name have helped to keep the wheels of this economy moving.

``Even though our efforts have been criticized and derided clearly for undisguised political reasons, we are proud that we had the courage to do something that made a positive difference when it would have been far too easy for us to appear reasonable by doing nothing and thereby make the situation worse.

``As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.

``Of course, in the short-term such interventions are without doubt inflationary but in the medium to long-term they trigger and propel economic growth and development that everyone craves for.”

Our comment:

Well, Dr. Gono should be exceptionally pleased to know that his peers have since been gradually and methodically assimilating his paradigm, albeit in a developed economy version and as showcase of the manifold tools available to the modern banking system.

Where Dr. Gono gloats, ``we are proud that we had the courage to do something that made a positive difference when it would have been far too easy for us to appear reasonable by doing nothing and thereby make the situation worse.”

Making a positive difference?

We refer to this top-10 “worst list” article where Zimbabwe is ranked the worst currency of the world.

Why?

Because $1 USD = 642,371,437,695,221,000 Zimbabwean Dollars!

According to top10-list.com, ``It's hard to keep track of just how fast the Zimbabwean dollar has fallen since the government reinstated electronic parallel market transfers on Nov. 13, but even before that the currency of Zimbabwe was the most worthless in the world.

``While the official rate on Monday was 19,393.94 Zimbabwean dollars to the $1 USD, the old mutual implied rate, generated from comparing the Zimbabwe and London stock exchanges, valued the currency at more than 642 quadrillion to one.

``When the currency was revalued this summer, an egg cost about $35 billion Zimbabwean dollars.”

Zimbabwe’s currency is losing value almost every minute, and that’s the positive and speediest difference!

Well for the list of the other worst currencies…

2^nd worst currency $1 USD = 35,000 Shillings

3^rd worst: Turkmenistan $1 USD = 24,000 Manat

4^th worst, Vietnam $1 UDS = 16,975.00 Dong

5^th Sao Tome and Principe $1 USD = 14,350 Dobra

6^th Indonesia $1 USD = 11,198.40 Rupiah

7^th Iranian Rial $1 USD = 10,179 Rial

8^th Laos $1 USD = 8,640.75 Kip

9^th Guinea Franc $1 USD = 5,115.00

10^th Paraguay $1 USD = 4,615.00 Guarani

Read the details here