Theories of the current crisis: Closing thoughts on the hyperinflationists
This is my final installment on the hyperinflationists section of theories of the current crisis for now. As I find in any good examination of a theory out there, I come away from this one with a better understanding of some of the problems of capitalism under conditions of absolute over-accumulation. The hyperinflationist argument forced me to confront several problems from the standpoint of the law of value, including, world market prices versus existing prices; ex nihilo currency and price behavior; definitions of price deflation, inflation and hyperinflation; definitions of depressions and recessions; the purchasing power of ex nihilo currency; and the rivalry between the monetary policies of the various nations states in relation to the Fascist State.
One of my conclusions from this examination is that FOFOA, properly understood, should not be in the hyperinflationist camp. I have no idea why he is advocating for dollar hyperinflation, since he, more than any other writer in the hyperinflationist camp, realizes the relationship between the purchasing power of an ex nihilo currency and the circulation of commodities. In 2010, he wrote:
Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!
Fekete says backwardation is when “zero [gold] supply confronts infinite [dollar] demand.” I am saying it is when “infinite supply of dollars confronts zero demand from real, physical gold… in the necessary VOLUME.” So what’s the difference? Viewed this way, can anyone show me how we are not there right now? And I’m not talking about your local gold dealer bidding on your $1,200 with his gold coin. I’m talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.
Don’t let the term “backwardation” throw you. It is one of those insider terms among commodity traders, which, for our purpose, can be safely ignored, since it adds nothing to FOFOA’s essential argument. What FOFOA is saying in this excerpt is that the purchasing power of an ex nihilo currency rests on the willingness of gold owners to accept it as means of payment in exchange for their commodities. Unfortunately, FOFOA limits his argument to gold and misses the significance of his insight. This is because, for reasons previously mentioned, he articulates the viewpoint of the petty capitalist, who, unable to operate independently, must of necessity hand his meager wealth over to Wall Street investment banksters if it is to operate as capital, or, failing this, accept the depreciation of its dollar purchasing power, or, convert it to a hoard of useless gold.
There is, however, no reason to limit FOFOA’s insight to gold. Having been displaced in circulation as money, gold is simply another commodity whose particular use value is that it serve as a store of value. It is excellent in this regard, but broccoli is excellent as a vegetable, while gold is not. The specific quality of gold is its limited use as mainly a store of value, and, in this regard, it has few substitutes, while broccoli has many substitutes. This, however, should not blind us to the fact that it is now an ordinary commodity like any other. The true significance of FOFOA’s insight is that the purchasing power of any ex nihilo currency is directly a function of the willingness of commodity owners to accept it in exchange for their commodities.
If commodity owners are unwilling to accept an ex nihilo currency in exchange for their commodity, or prefer another currency in exchange for their commodity over that particular currency, its purchasing power will quickly fall toward zero — hyperinflation. This is precisely what happened in the case of the Zimbabwe dollar, which was undermined not only by the profligacy of the state, but also, by the preference of commodity owners for dollars and euros as a result of this profligacy. As FOFOA knows, the dollar is not likely to suffer such a fate, since its purchasing power rests on the fact that it is accepted for any commodity on the world market, and, consequently, is “undervalued” against all other ex nihilo currencies. Even if the purchasing power of a single ex nihilo dollar falls, the purchasing power of the total sum of dollars in circulation is not affected — it is still “undervalued” in relation to all other ex nihilo currencies, and must be undervalued as long as the total quantity of all other currencies is greater than zero.
By the same token, FOFOA’s insight demonstrates why, despite the constant depreciation of a single ex nihilo dollar, the sum of existing prices within the world market must be higher than world market prices denominated in dollars. No matter the depreciation of a single ex nihilo dollar, the sum of world market prices must fall toward world market prices denominated in dollars. Thus, the monetary policies of other nations is determined by the monetary policies of the Fascist State. Any nation wishing to pursue a so-called loose monetary policy, as Zimbabwe did, must find its ex nihilo currency displaced by dollars as commodity owners demand dollars in place of the national currency. On the other hand, the “tightening” of monetary policy by other nations cannot save these national currencies, since such “tightening” only leads them to the same fate as gold itself — they are withdrawn from circulation in a deflation of prices.
The end result, in either case, is the demonetization of all ex nihilo currencies except the dollar, and the equalization of the sum of prices within the world market with world market prices denominated in dollars. Hyperinflation and deflation do occur, but they occur in every other ex nihilo currency except the dollar.
From John Williams and FOFOA, I better understand the likely consequence of Fascist State economic policy — the front-loading of a series of events leading to the collapse of ex nihilo currencies by the fall of the sum of prices within the world market to the price level imposed by the dollar. This is because, as opposed to the deflationists, the hyperinflationists show the Fascist State will not sit by and let its dominant position be threatened by mere accounting identities. It will defend that position even at the expense of all other currencies. FOFOA is clearer on this point than Williams, but Williams implies it as well.
Paradoxically, FOFOA’s argument lends support, not for the hyperinflationist camp, but Modern Monetary Theory (MMT). His insight confirms the assumptions of the modern money theorists that the Fascist State faces no external constraint on its expenditures, since all ex nihilo currencies are only worthless dancing electrons on the computer terminals of central banks. The question raised by Fascist State expenditures is not its effect on national accounting balances, but the effect of these expenditures on other ex nihilo currencies. The accelerated spending of the Fascist State drives all of these currencies out of existence.
I look forward to examining this in a similar survey of modern money theory at another time.