Monday, March 26, 2012

Is Hyperinflation No Longer Unfathomable?

In recent times EJP's Robert Wenzel has been updating us on the persisting rise in the "price level" induced by the U.S. FED's policy of heavy inflation of the money supply. Today Reuters reports:
Bernanke Says U.S. Needs Faster Growth

(Reuters) - The U.S. economy needs to grow more quickly to bring down the unemployment rate further, Federal Reserve Chairman Ben Bernanke said on Monday, defending the central bank's policy of very low interest rates.
While he offered no indication that the Fed is keen to embark on a third round of bond purchases, Bernanke also made clear the Fed is in no rush to reverse course after responding aggressively to a deep recession.
It seems that the boost to "effective demand" which has been driving stock, commodity and food prices up is not to the Chairman's satisfaction. While Bernanke's critics have been pointing to the debilitating effects of this monetary inflation (price inflation being the first and foremost), the consensus seemed to be that a German style hyperinflation of 1919-1923 was not to be feared. 

Is it unreasonable to amend that attitude after Bernanke's latest statement? For if he judges that even more money is necessary to be pumped despite all the evidence of monetary saturation of the markets, I venture to suggest that no amount of "elasticity of the money supply" will suffice for the Chairman. 

Bernanke's claim that a larger money supply is necessary to reduce unemployment in the U.S. has been proven to be a great myth by the German hyperinflation. Below is a chart from Henry Hazlitt's The Inflation Crisis And How to Resolve It:


October 1923

November 1923

December 1923

January 1924

February 1924

March 1924

April 1924

May 1924

June 1924

Note that the peak of hyperinflation was in the late parts of 1923 and early 1924. Also note that, according to the same work:
there was a great increase in unproductive work. As a result of changing prices and increased speculation, the number of middlemen increased continually. By 1923 the number of banks had multiplied fourfold over 1914. Speculation expanded pathologically. When prices were increasing a hundredfold, a thousandfold, a millionfold, far more people had to be employed to make calculations, and such calculations also took up far more time of old employees and of buyers. With prices racing ahead, the will to work declined. The production of coal in the Ruhr, which in 1913 had been 928 kilograms per miner, had decreased in 1922 to 585 kilograms. The "dollar rate" was the theme of all discussions.
Therefore, the lower unemployment rates prior to the peak of the hyperinflation were to a certain degree a result of fake (so to speak) jobs. We have already been seeing fake jobs brought on by bubbles; however the reports of this sort of employment are increasing. 

With Bernanke in full printing mode, hyperinflation in our day may not be a far-fetched idea anymore.

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