MONEYLESS: FOFOA on Hyperinflation (or “too little money”)
Toward the end of his case against the modern money school, FOFOA offers this insight into Wiemar Republic hyperinflation, and what he argues is the basis for the coming hyperinflation set to be unleashed in the dollar system:
As the German Mark fell, there was “not enough money” to pay the debt. And with a little inflation, there is “not enough money” to buy our necessities from abroad.
Hyperinflation, FOFOA argues, is commonly described as a rapid rise in the general price level — an incredibly sharp burst of inflation where the prices of commodities increase a hundred-fold, even a thousand-fold, as a result of a rapid depreciation of the purchasing power of the currency. But, hyperinflation can also be thought of as a sudden implosion — collapse — in the supply of money in relation to the prices of commodities. A situation emerges where there is “not enough money” to pay for commodities.
FOFOA quotes writers who made this observation during the time of Wiemar Republic Germany in the 1920s:
“In proportion to the need, less money circulates in Germany now than before the war.” (Julius Wolfe, 1922)
“However enormous may be the apparent rise in the circulation in 1922, actually the real figures show a decline.” (Karl Eister, 1923)
The phrase, “not enough money”, is ironic precisely because, using FOFOA’s definition of money, it appears the deficiency could be resolved by simply printing more dollars. If dollars were money, it would be reasonable to expect a shortage of money as existed in the financial crisis of 2008 could be remedied by going to a computer terminal and crediting the accounts where this lack of money was most acute. In fact, as FOFOA explains, this was exactly what the monetary authorities attempted:
…Mervyn King made headlines saying “the UK was suffering from a 1930s-style shortage of money.”
“There is not enough money. That may seem unfamiliar to people.” he told Sky News. “But that’s because this is the most serious financial crisis at least since the 1930s, if not ever.”
However, as FOFOA explains simply printing more currency does not and cannot fix a hyperinflation; instead, the hyperinflation is exacerbated by such actions:
It should be obvious from this video that Mervyn King, at least, does not get that expanding the base which debases the economy’s money is not the best response to “not enough money.” You don’t have enough money, so you make what you’ve got worth less? Perhaps he meant the monetary base is too small for the credit clearing system. He did, after all, reference the 1930s rather than the ’20s. But, sadly, that’s not the case because he clearly said “we are injecting 75 billion (with emphasis reminiscent of Dr. Evil) pounds directly into the British economy.” But in King’s defense, he’s doing no different than the Fed or the Reichsbank
FOFOA makes the argument printing currency does not resolve the problem of too little money, but only dilutes the existing stock of currency already in circulation. Obviously, for this to be true, dollars, pounds, euros and rubles must not be money, but tokens of money. However, using this same reasoning, it becomes clear that “too little money” cannot be the basis for his prediction of a future hyperinflation of the dollar: there has been no money in the world economy since the dollar was debased from gold in 1971.
To approach this another way: in 1971 one dollar had the official definition of 1/35th of an ounce of gold. A commodity having the price of one dollar had the exchange value equal to this same 1/35th of an ounce of gold. When Nixon took the dollar off the gold standard, one dollar had the official definition of zero ounce of gold. A commodity having a price of one dollar had no exchange value whatsoever. Effectively, the dollar was worthless, and the country was plunged into an actual hyperinflation, where no dollar price, no matter how high, sufficed to express the actual money price of a commodity. One billion dollars could be entered in a computer terminal and credited to the account of a seller without paying even a vanishingly small fraction of the actual price of the commodity in ounces of gold.
It is interesting in this regard that no seller of commodities immediately demanded gold in exchange for her commodities, and refused any amount of dollars, no matter how great, in return for her commodity. In the case of the Weimar Republic, Zimbabwe, and the confederate money of the American Civil War, two price systems quickly sprung up — one denominated in the official currency, and another — or many — in “sound” money. The Wikipedia explains that, in the case of Zimbabwe, dollars and euros circulated in the economy as money, quickly displacing the Zimbabwe dollar as medium for the circulation of commodities. Eventually the government had to recognize its currency was not money:
The use of foreign currencies were legalised in January 2009, causing general consumer prices to stabilise again after years of hyperinflation and price speculation. The move led to a sharp drop in the usage of the Zimbabwean dollar, as hyperinflation rendered even the highest denominations worthless.
On 2 February 2009 the Zimbabwean dollar was redenominated once more, at the ratio of 1,000,000,000,000 ZWR to 1 ZWL. The third dollar was expected to be demonetised on 1 July 2009, but the complete abandonment of local currency was hastened by the decline in overall consumer usage of local currency in favour of other currencies, helped by the legalization of the use of hard currencies in January 2009.
The dollar was effectively abandoned as an official currency on 12 April 2009 when the Economic Planning Minister Elton Mangoma confirmed the suspension of the national currency for at least a year, but exchange rates with the Zimbabwean dollar were maintained for up to a year afterwards. The current government of Zimbabwe said that the Zimbabwean currency should only be reintroduced if the industrial output was 60% or more of its capacity, compared to the April 2009 average of 20%.
If hyperinflation is defined as a lack of sufficient money in circulation, I think it is safe to say we have been experiencing it at least since 1971, when the dollar was debased from gold. If it is defined as an incredibly sharp burst of inflation where the prices of commodities relative to the value of these commodities increases to astronomical levels, we can also date it to 1971, when, owing to the debasement of the dollar, the value expressed in any dollar price was zero. What has to be explained is why, despite the dollar’s evident lack of value, commodity sellers have not abandoned it in favor of a money capable of expressing the value of their commodities, or, failing this, reverted to simple barter, as occurred in every previous episode of hyperinflation.
Hyperinflation can either be thought of as too little money in circulation or the rapid increase in the currency prices of commodities in relation to their values. FOFOA wants to accuse the advocates of the modern money school with setting the global economy on a course to a catastrophic hyperinflation; yet, by both definitions of hyperinflation he uses we have been living in a hyperinflationary monetary regime for forty years now. A worthless debased currency characteristic of hyperinflation has served as the medium of circulation for four decades without resulting in the sort of monetary disaster he predicts.
FOFOA has an explanation for this, a synopsis of which I present in the extensive excerpt below:
The US has enjoyed a non-stop inflow of free stuff including oil (a trade deficit) ever since 1975, the last year we ran a trade surplus. In the 1970s, following the Nixon Shock and the OPEC Oil Crisis, the US dollar went into a tailspin. Because the US dollar was the global reserve currency, this was bad news for the global economy. If the dollar had failed then, without a viable replacement currency representing an economy at least as large as the US, international trade would have ground to a standstill.
Europe was already on the road to a single currency, but it still needed time, decades of time. So at the Belgrade IMF meeting in October of 1979, a group of European central bankers confronted the newly-appointed Paul Volcker with a “stern recommendation” that something big had to be done immediately to stop the dollar’s fall. Returning to the US on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy.
Meanwhile, the European central bankers made the tough decision to support the US dollar, at significant cost to their own economies, by supporting the US trade deficit by buying US Treasuries for as long as it took to launch the euro. As it turns out, it took 20 years. After the launch of the euro, the Europeans slowly backed off from supporting the dollar. But right about that same time, China stepped up to the plate and started buying Treasuries like they were hotcakes. This may have been related to China’s admission into the WTO in 2001.
Then, sometime around 2007 or 2008, the dollar’s Credibility Inflation peaked. The growth of the “economy’s money” (credit denominated in dollars) hit some kind of a mathematical limit (expanding to the limit was wholly due to FOFOA’s dilemma) and began to contract. Since then, China has slowly backed off from supporting the dollar. We now know that China is more interested in using its reserves to purchase technology and resource assets wherever they are for sale than bonds from the US Treasury. China is also expanding the economic zone that uses its monetary base as a reference point in trade settlement to the ASEAN countries.
Meanwhile, the junkie USG has kept the free stuff flowing in by expanding the monetary base. Sure, China still wants to sell her goods to the US, but she’s no longer supporting the price stability of the last 30 years by recycling the dollar base expansion back into USG debt.
Essentially, FOFOA’s argument is that the dollar has not collapsed because commodity sellers need it to serve a medium for the circulation of their commodities. Although the dollar is incapable of serving as the material to denominate the value of their commodities, the dollar is more than adequate to serve as medium of circulation for commodities. While the first function — denominating value — requires money in the material form of a physical commodity like gold; the second function — medium of circulation — requires only a token of money, currency.
FOFOA is making the perfectly reasonable argument that so long as the dollar is required for the circulation of commodities within the world market, it can perform the function of medium of circulation without difficulty. However, once the circulation of commodities is interrupted, and money must step forward in its own physical body, shit is going to hit the fan on a scale never before seen in human history.