Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

[gwynedd1]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

I tend to think hyperinflation typically happens when productive capacity is destroyed. Hyperinflation in Germany did not coincidently happen soon after a war. Zimbabwe eliminated their farming class. So I tend to see hyperinflation as an end game. I do not think it is initiated by monetary policy but only in a desperate attempt to buy what isn't there.

[metalman]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

I tend to think hyperinflation typically happens when productive capacity is destroyed. Hyperinflation in Germany did not coincidently happen soon after a war. Zimbabwe eliminated their farming class. So I tend to see hyperinflation as an end game. I do not think it is initiated by monetary policy but only in a desperate attempt to buy what isn't there.

read this paper referenced in part 2...

Inflation and Hyperinflation in the 20th Century: Causes and Patterns (pdf), Amadou Dem, Gabriela Mihailovici, and Hui Gao, Columbia School of International and Public Affairs, 2001:

nice rundown previous hyperinflation episodes... eg.

II. B] - Hyperinflation in early this Century

˙ The Aftermath of WW I : Austria, Germany, Hungary, Poland, Russia

In the aftermath of World War I, five countries in Central Europe and Asia fell into the grips of hyperinflation, Austria, Germany, Hungary, Poland and the Soviet Union. All these hyperinflations occurred in a relatively short period of time, from 1921 to 1924, and all emerged

in the chaotic conditions that followed the end of World War I.

1. Austria & Hungary

Austria and Hungary were carved out of the collapsed Hapsburg Empire at the end of World War

I. Both countries lost much of their traditional land, while at the same time they were required to

absorb the large bureaucracy of the former Empire. As loser of World War I, in the 1920s, these

two countries also faced the grim prospects of reparation payments to the victorious allied

powers, as set in the treaties of Trianon and Versailles. In Austria and Hungary, the reparation

obligations were feared to be large, the mere fact that the Reparation Commission had a major,

albeit unknown, claim on the assets of both governments cast a significant shadow over public

finances in the two countries. Under a fiat regime, the value of the currency ultimately rests on

the ability of the government to keep its budget under control not only in the present but also in

the future. Furthermore, as two of the most conspicuously weak governments after World War I,

Austria and Hungary were both new states, significant doubts existed inside and outside these

countries about their future viability.

In addition, the Austrian government was burdened by the need to make large transfer payments

to the unemployed. The Hungarian authorities extended great amounts of highly subsidized

credits to the private sector. Thus public budgets were under very heavy strains in both countries.

Eventually, these strains erupted as hyperinflations.


8
3. Germany

Germany was not a new state, although the prewar regime was crushed. A new and fragile

democracy, known as the Weimar Republic, was established, and the new regime was

immediately buried under the burdens resulting from the war. With the huge reparations imposed

by the Treaty of Versailles, the new state began with a crushing fiscal burden, the staggering

value of the reparation payments that the country sent abroad was the central element of public

finance from 1919 to 1923, while Germany was ruled by an inexperienced socialist government

that could not pass a much needed tax reform. In 1922 and 1923, Germany experienced several

armed uprisings and important breakdowns of public order. The situation worsened enormously

in 1923 when the French occupied the area of the Ruhr, the industrial heartland of the country.

The Germans responded to the occupation with passive resistance and widespread labor strikes.

The government paid the strikers by taking loans from the Reichsbank (as the German central

bank at that time). Finally, a hyperinflation exploded. In a period of 15 months, prices rose by

about 1 trillion percent. At its highest, the monthly inflation rate topped 30,000 percent!

4. Poland

Poland suffered substantial social and political turmoil when the end of World War I brought not

peace but a continuing confrontation with Russia that only ended in 1920.

Poland was also a new state. After the partitions of Poland at the end of the eighteen century, its

pieces had been absorbed in the Hapsburg, Russian, and German empires, and Poland was re-

created out of these pieces at the end of World War I. Poland suffered not only the birth pains of

a new and fragile country patched together at the end of the war, it also bore the heavy costs of a

war with the Soviet Union that lasted until late in 1920. Furthermore, the new state of Poland

after World War I was left with an inexperienced civil administration after many of its prewar

civil authorities left the country. Under these circumstances, Poland has run into a hyperinflation

during 1922 – early 1924.

5. Russia

The Soviet Union was created in the most chaotic circumstances of all the new states founded

after World War I. This country was established through a violent revolution and civil war that followed upon Russia’s costly participation in the War. The hyperinflation erupted as a result of

monetary chaos in the wake of both economic devastation and the civil war.

˙ The Aftermath of World War II: China, Hungary, and Greece

The next round of hyperinflations occurred in the wake of World War II, when three widely

separated countries, China, Greece, and Hungary, slid into monetary chaos. The same internally

unstable conditions can be found in two of the three countries undergoing hyperinflation in the

late 1940s. China and Greece were experiencing civil war, although this was not the case in

Hungary.

1. China/Taiwan

After nearly a decade of war with the Japanese, in 1945 China fell into a civil war between the

Nationalist faction under Chiang Kai-shek and the Communist under Mao Tse-Tung. The heavy

strain on the budget during the war became even more intense under the internal confrontation,

and hyperinflation ensued. An interesting aspect of China at that time was the proliferation of

currencies. There were several different currencies circulating in different areas controlled

separately by Nationalist government and the Communist. Between 1947 and 1949, there were

several separate hyperinflations in different currencies going on in parallel in China. After the

Nationalist faction retreated to Taiwan in 1949, inflation came down from its astronomical levels,

but still remained high for some time.

2. Greece

A civil war also followed World War II in Greece. The Germans occupied the country from 1940

to 1944 and placed severe demands on the government, which were met increasingly by printing

money. When the Germans were driven out by the British in 1944, a civil war exploded between

the two main resistance groups: the monarchists and the communists, while noncommunists

controlled the civil administration. Hyperinflation erupted in the midst of the civil war.

3. Hungary

Hungary’s hyperinflation during 1945-1946 is remarkable in two ways. First, it is the only

country to have experienced two hyperinflations in the short period of 20 years. Second, it is the

highest hyperinflation in world history. Prices rose an astonishing 3.8 octrillion times (3.8 ∞

1027) in a mere one year, and the average monthly inflation rate was 19, 800 percent. Hungary,

which in the early 1940s allied itself with the Axis powers, had been an important battleground,

and it lost an estimated 40% of its physical capital. As a loser of the war, it had to pay staggering

reparations to the Allies, especially to the Soviets. After World War II, Hungary was another

case of large effective reparations and occupation payments contributing to a fiscal crisis. It is

calculated that reparation and occupation costs (payments to the occupying Soviet army)

represented 25% to 50% of government spending in 1945 – 1946. One further explanation of

Hungary’s extraordinary inflation rate was its widespread use of indexed deposits and later of

indexed currency. This practice shrank the demand for nonindexed money, which was the base

of the inflation tax, and thus collecting a given amount of revenue required increasing inflation

rates.

Hungary also fits the model of a weak government. Although the ruling party, the Smallholders,

was elected with 60 percent of the vote in 1945, the country’s sovereignty was severely

compromised by the Allied Control Commission, led by the Soviet Union. When the central

bank attempted to put the brakes on monetary emission, for example, the Commission refused to

allow it.

etc/////

[ASH]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

What's wrong?

I am unable to prepare myself sufficiently and I worry for my Son.

I'm there with you cjppjc -- but ain't nobody "sufficiently prepared" if we end up in a hyperinflationary depression. Frankly, if the economy collapses, the best strategy is that proposed by Mr. Miyagi (or Lukester) -- "No be there." Moving to a country with a functional economy is always going to be safer than sticking it out in a country experiencing hyperinflation, no matter how elaborately prepared your bunker is, or how deep you bury your gold. ... But in a world convulsed in economic turmoil, where is security to be found? If you don't feel adequately prepared for the collapse of the national economy, you've got a lot of company. Anyway, even those with lifepreservers will be required to share, as EJ says, when the Titanic sinks -- so there's a limit to how much of an advantage you could preserve, even if you had more resources.

But take heart! I don't think EJ intended this article as license for iTulip readers to despair. In the first place, just because a worst case scenario is admitted to be possible doesn't mean it is a forgone conclusion. Hyperinflation doesn't have to happen. Second, it sounds like the onset of hyperinflation caused by monetization won't be sudden -- not like a currency event, such as EJ's POOM. That means if we really are headed into the icy water, we'll have a bit of time to scurry around on the deck first, after we hit the iceburg. May as well postpone our angst until then.

[metalman]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

I'm there with you cjppjc -- but ain't nobody "sufficiently prepared" if we end up in a hyperinflationary depression. Frankly, if the economy collapses, the best strategy is that proposed by Mr. Miyagi (or Lukester) -- "No be there." Moving to a country with a functional economy is always going to be safer than sticking it out in a country experiencing hyperinflation, no matter how elaborately prepared your bunker is, or how deep you bury your gold. ... But in a world convulsed in economic turmoil, where is security to be found? If you don't feel adequately prepared for the collapse of the national economy, you've got a lot of company. Anyway, even those with lifepreservers will be required to share, as EJ says, when the Titanic sinks -- so there's a limit to how much of an advantage you could preserve, even if you had more resources.

But take heart! I don't think EJ intended this article as license for iTulip readers to despair. In the first place, just because a worst case scenario is admitted to be possible doesn't mean it is a forgone conclusion. Hyperinflation doesn't have to happen. Second, it sounds like the onset of hyperinflation caused by monetization won't be sudden -- not like a currency event, such as EJ's POOM. That means if we really are headed into the icy water, we'll have a bit of time to scurry around on the deck first, after we hit the iceburg. May as well postpone our angst until then.

ej is exploring the possibility of hyperinflation after dismissing it for 10 yrs... makes the point that the gov't can get off the inflation track today if it so chose to! so we watch the 10 pre-conditions... if they get worse, the risk is higher, if better the risk is lower.

the other way to read this is... if the gov't stops this fiscal/banking system corrruption/debt nonsense and gets its shit together, it's time to sell gold and get bullish on the economy again.

that said, if the gov't starts to monetize debt... surely that will precipitate poom.

[bpr]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

Employers index salaries to inflation, but as the economy will have come to a standstill and output has collapsed, the unemployment rate will exceed 50%.

This is something I don't get, and I've heard it echoed elsewhere.

How will salaries (notoriously "sticky," as I've also heard elsewhere) be indexed to inflation, even as unemployment soars?

Also in this context, what is inflation? I can't imagine it being the CPI, but possibly the PPI, but likely neither. It is unlikely to mirror "real" shadowstats/grocery store inflation.

My concern is possibly unjustified, since I work for a very small exporter of services, but I assume that this kind of indexing only happens with new job creation, not with job retention (eg, existing employees get the same 2010 wages, maybe a 3% increase, while new employees get the new 2011 wages, indexed to profits/costs).

I just dont get how macroeconimic phenomena like inflation leaks down (avoiding the T word) to the micro worker.

Maybe a fellow Ituliper can lay this out for me.

Thanks for the wake up call. I've been expecting it.

[junkacc]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

Salaries will lag considerably to inflation when hyperinflation starts. By the time hyperinflation is in full swing, it will not be about buying a mcmansion but buying the basic nessecities.

If my salary is not inflation indexed ie) will not buy me a loaf of bread by the time I get my next pay check, its not worth my time to work. My time would be better spent stealing and pillaging.

[Chris]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

EJ, is the probability high for a hyperinflation in the UK?

[we_are_toast]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

So our choice is massive depression or Hyperinflation, or both?!:mad:

Ok, I'm an idealist and believe that grassroots campaigns can work. I'm not willing to simply sit back and watch this happen. The iTulip community is pretty sophisticated and I'm sure participates in many other places on the internet and may even have some influence.

A while ago I argued on another thread that I wasn't interested in proposed solutions by iTulip, I only wanted analysis of solutions that will be implemented. But this apocalyptic forecast has changed my mind. What good is my subscription to iTulip if we have a complete break down of our social infrastructure?

Now I want to see a proposed solution that will prevent this from happening, so I can at least try to promote it on other places on the internet. Come on FRED, EJ, what SHOULD the government be doing to get us out of this mess? Let's see a proposal, all in one article!

Sorry for the frustration, but this article is saying; we are toast!

[flintlock]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

If government fiscal responsibility is key to avoiding hyperinflation then I'd say hyperinflation is a forgone conclusion. I just don't see it as being politically feasible.

[Quincy K]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

for most countries, I believe that the debt levels are already past the Rubicon and there is no way they can be inflated away. since the G-7 is all that really matters and we all suffer the same debt issues and most will eventually succumb to GD2, why not roll out a new global currency backed by some trivial amount of gold(10 percent)? we fuc*ed up, we're sorry and we won't ever allow it to happen again. by the way, thanks for playing. the dollar, euro, yen, ruble and renminbi are all revalued into a new world currency, debt is monetized and we start the game(Ponzi) all over again. obviously, this scenario is too early but one that may be implemented once the U.S. believes that they will no longer have Reserve Currency status(prior to outright currency collapse).

who says we must all(g-7 countries) suffer through another GD when we can clear the game board and start over?

I mean, have global debt conditions EVER been this bad before?

[bpr]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

So our choice is massive depression or Hyperinflation, or both?!:mad:

Ok, I'm an idealist and believe that grassroots campaigns can work. I'm not willing to simply sit back and watch this happen. The iTulip community is pretty sophisticated and I'm sure participates in many other places on the internet and may even have some influence.

A while ago I argued on another thread that I wasn't interested in proposed solutions by iTulip, I only wanted analysis of solutions that will be implemented. But this apocalyptic forecast has changed my mind. What good is my subscription to iTulip if we have a complete break down of our social infrastructure?

Now I want to see a proposed solution that will prevent this from happening, so I can at least try to promote it on other places on the internet. Come on FRED, EJ, what SHOULD the government be doing to get us out of this mess? Let's see a proposal, all in one article!

Sorry for the frustration, but this article is saying; we are toast!

EJ lays it out, but I don't get the US example he uses:

ending inflation can be accomplished by a combination of two steps: one, pegging the currency to a nominal anchor, such as another more stable currency or to a fixed asset, such as land or gold, and, two, addressing the primary cause of all hyperinflations: fiscal mismanagement.

OK, so these two conditions will avoid a hyperinflation.

the US government will take the necessary steps to halt inflation should it arise, as in the early 1980s when fiscal austerity put the US economy into two wrenching recessions that brought inflation down from double digits to zero. Sound economic, fiscal, and monetary management is the nominal anchor for the US dollar.

Okay, the fiscal mismanagement was dealt with by Volcker's ratcheting up interest rates, right? But what about step one? Was the dollar pegged to anything in the early 80s? Is "sound fiscal and monetary management" an appropriate fiat for a "fixed asset", as called for in the first quote?

Someone help me out here.

[gwynedd1]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

read this paper referenced in part 2...

Inflation and Hyperinflation in the 20th Century: Causes and Patterns (pdf), Amadou Dem, Gabriela Mihailovici, and Hui Gao, Columbia School of International and Public Affairs, 2001:

nice rundown previous hyperinflation episodes... eg.

II. B] - Hyperinflation in early this Century

˙ The Aftermath of WW I : Austria, Germany, Hungary, Poland, Russia

In the aftermath of World War I, five countries in Central Europe and Asia fell into the grips of hyperinflation, Austria, Germany, Hungary, Poland and the Soviet Union. All these hyperinflations occurred in a relatively short period of time, from 1921 to 1924, and all emerged

in the chaotic conditions that followed the end of World War I.

1. Austria & Hungary

Austria and Hungary were carved out of the collapsed Hapsburg Empire at the end of World War

I. Both countries lost much of their traditional land, while at the same time they were required to

absorb the large bureaucracy of the former Empire. As loser of World War I, in the 1920s, these

two countries also faced the grim prospects of reparation payments to the victorious allied

powers, as set in the treaties of Trianon and Versailles. In Austria and Hungary, the reparation

obligations were feared to be large, the mere fact that the Reparation Commission had a major,

albeit unknown, claim on the assets of both governments cast a significant shadow over public

finances in the two countries. Under a fiat regime, the value of the currency ultimately rests on

the ability of the government to keep its budget under control not only in the present but also in

the future. Furthermore, as two of the most conspicuously weak governments after World War I,

Austria and Hungary were both new states, significant doubts existed inside and outside these

countries about their future viability.

In addition, the Austrian government was burdened by the need to make large transfer payments

to the unemployed. The Hungarian authorities extended great amounts of highly subsidized

credits to the private sector. Thus public budgets were under very heavy strains in both countries.

Eventually, these strains erupted as hyperinflations.


8
3. Germany

Germany was not a new state, although the prewar regime was crushed. A new and fragile

democracy, known as the Weimar Republic, was established, and the new regime was

immediately buried under the burdens resulting from the war. With the huge reparations imposed

by the Treaty of Versailles, the new state began with a crushing fiscal burden, the staggering

value of the reparation payments that the country sent abroad was the central element of public

finance from 1919 to 1923, while Germany was ruled by an inexperienced socialist government

that could not pass a much needed tax reform. In 1922 and 1923, Germany experienced several

armed uprisings and important breakdowns of public order. The situation worsened enormously

in 1923 when the French occupied the area of the Ruhr, the industrial heartland of the country.

The Germans responded to the occupation with passive resistance and widespread labor strikes.

The government paid the strikers by taking loans from the Reichsbank (as the German central

bank at that time). Finally, a hyperinflation exploded. In a period of 15 months, prices rose by

about 1 trillion percent. At its highest, the monthly inflation rate topped 30,000 percent!

4. Poland

Poland suffered substantial social and political turmoil when the end of World War I brought not

peace but a continuing confrontation with Russia that only ended in 1920.

Poland was also a new state. After the partitions of Poland at the end of the eighteen century, its

pieces had been absorbed in the Hapsburg, Russian, and German empires, and Poland was re-

created out of these pieces at the end of World War I. Poland suffered not only the birth pains of

a new and fragile country patched together at the end of the war, it also bore the heavy costs of a

war with the Soviet Union that lasted until late in 1920. Furthermore, the new state of Poland

after World War I was left with an inexperienced civil administration after many of its prewar

civil authorities left the country. Under these circumstances, Poland has run into a hyperinflation

during 1922 – early 1924.

5. Russia

The Soviet Union was created in the most chaotic circumstances of all the new states founded

after World War I. This country was established through a violent revolution and civil war that followed upon Russia’s costly participation in the War. The hyperinflation erupted as a result of

monetary chaos in the wake of both economic devastation and the civil war.

˙ The Aftermath of World War II: China, Hungary, and Greece

The next round of hyperinflations occurred in the wake of World War II, when three widely

separated countries, China, Greece, and Hungary, slid into monetary chaos. The same internally

unstable conditions can be found in two of the three countries undergoing hyperinflation in the

late 1940s. China and Greece were experiencing civil war, although this was not the case in

Hungary.

1. China/Taiwan

After nearly a decade of war with the Japanese, in 1945 China fell into a civil war between the

Nationalist faction under Chiang Kai-shek and the Communist under Mao Tse-Tung. The heavy

strain on the budget during the war became even more intense under the internal confrontation,

and hyperinflation ensued. An interesting aspect of China at that time was the proliferation of

currencies. There were several different currencies circulating in different areas controlled

separately by Nationalist government and the Communist. Between 1947 and 1949, there were

several separate hyperinflations in different currencies going on in parallel in China. After the

Nationalist faction retreated to Taiwan in 1949, inflation came down from its astronomical levels,

but still remained high for some time.

2. Greece

A civil war also followed World War II in Greece. The Germans occupied the country from 1940

to 1944 and placed severe demands on the government, which were met increasingly by printing

money. When the Germans were driven out by the British in 1944, a civil war exploded between

the two main resistance groups: the monarchists and the communists, while noncommunists

controlled the civil administration. Hyperinflation erupted in the midst of the civil war.

3. Hungary

Hungary’s hyperinflation during 1945-1946 is remarkable in two ways. First, it is the only

country to have experienced two hyperinflations in the short period of 20 years. Second, it is the

highest hyperinflation in world history. Prices rose an astonishing 3.8 octrillion times (3.8 ∞

1027) in a mere one year, and the average monthly inflation rate was 19, 800 percent. Hungary,

which in the early 1940s allied itself with the Axis powers, had been an important battleground,

and it lost an estimated 40% of its physical capital. As a loser of the war, it had to pay staggering

reparations to the Allies, especially to the Soviets. After World War II, Hungary was another

case of large effective reparations and occupation payments contributing to a fiscal crisis. It is

calculated that reparation and occupation costs (payments to the occupying Soviet army)

represented 25% to 50% of government spending in 1945 – 1946. One further explanation of

Hungary’s extraordinary inflation rate was its widespread use of indexed deposits and later of

indexed currency. This practice shrank the demand for nonindexed money, which was the base

of the inflation tax, and thus collecting a given amount of revenue required increasing inflation

rates.

Hungary also fits the model of a weak government. Although the ruling party, the Smallholders,

was elected with 60 percent of the vote in 1945, the country’s sovereignty was severely

compromised by the Allied Control Commission, led by the Soviet Union. When the central

bank attempted to put the brakes on monetary emission, for example, the Commission refused to

allow it.

etc/////

Hi metalman,

Great post. Weak government is certainly a good predictor of capital deterioration. The role of government is to keep order. The productive capacity of a country depends on its ability to organize capital to productive capacity. When the authority of government is not there it cannot organize.

The Confederacy was an interesting case of a government's authority while under duress and the effect on its currency.

http://www.bivouacbooks.com/bbv5i2s1.htm

[don]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

Hyperinflation site if it should come:

http://lds.about.com/od/preparedness...eparedness.htm

Their reasons may be a bit outside your worldview but they've been getting this down for a long time...the storage bit

[don]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

On the other hand, maybe we're selling the Feds short.

Bernanke's helicopter after what were thought to be merely symbolic budget cuts:

[Guinnesstime]

Re: Hyperinflation case revisited: Will we complete the trip? - Eric Janszen

Don't know about you guys, but have I been prepping foodstuffs and talking to people from harder times for advice. I also plan to do a little brewing and distilling to use as a liquid currency when paper = poo poo.
Its always good be prepared for anything even if anything is nothing at all.