!Quelle Surprise! Like Greece and Spain before it, the UK finds austerity can only result in more austerity:
U.K. Tories to Press Ahead With $16 Billion of Welfare Cuts
The Conservative Party will press ahead with plans to cut 10 billion pounds ($16 billion) from the welfare budget and reduce spending by most other departments as it extends Britain’s austerity program into a seventh year.
The cuts to the benefits budget will go ahead as long as they meet safeguards sought by Work and Pensions Secretary Iain Duncan Smith, who has clashed with Chancellor of the Exchequer George Osborne on the issue since the party came to office in 2010. Duncan Smith and Osborne published a letter today saying the differences had been resolved.
“We are both satisfied that this is possible and we will work together to find savings of this scale,” the ministers said, according to excerpts released by Osborne’s office.
Osborne will address activists at the Conservatives’ annual conference in Birmingham, central England, later today, seeking to assure voters that his party will spread the pain of austerity across society. He’ll accuse the opposition Labour Party of focusing too much of that effort on the rich.
“There’s unfairness if people listening to this show are about to go out to work and they look across the street at their next door neighbour with blinds pulled down, living off a life on benefits,” Osborne said in an interview with BBC Radio 5 today. “Is it fair that a young person straight from school who has never worked can find themselves getting housing benefit to live in a flat when people who are working, perhaps listening to this program, are still living with their parents” because they can’t afford to move out, he asked.
Osborne is seeking to extend spending reductions across government departments as a 2010 effort to rid Britain of its budget deficit by 2015 is pushed back a further two years. Britain spends more than 200 billion pounds a year on welfare, accounting for 30 percent of total government spending. The Treasury said in March that welfare cuts of 10 billion pounds are needed by the fiscal year that runs through March 2017 on top of the 18 billion pounds of savings already announced.
See this is the problem with austerity — the more you cut, the more you must cut. Folks, if the fascist state is subsidizing capitalism by accumulating debt, cutting fascist state deficits only weakens capitalism.Since the fascist state is propping up profits through its accumulation of debt, if this debt accumulation is reduced, it sets off a vicious cycle which can only end in each round of cuts making necessary the next round of cuts.
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.
In a recent post, Deflation or Hyperinflation, FOFOA begins the meat of his argument with investment adviser Rick Ackerman (who, until recently, predicted this present crisis will end in a debt deflation) by directly addressing Ackerman’s core deflationist argument, which originally was set forth in a 1976 book by C.V. Myers, The Coming Deflation:
My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
FOFOA’s response to the deflationist argument was both simple and fatal for the deflationist argument:
Yes, someone will pay. But there is a third option that is missing from Myers’ dictum. “The hit” can be socialized…
What the deflationist miss, says FOFOA, is that Washington will never accept the collapse of its failing economic mechanism. It will create whatever quantity of ex nihilo dollars it takes to socialize the losses of financial institutions, pension funds, etc. — even if this threatens the viability of global financial system and the dollar itself.
Like FOFOA, I want to begin this post by directly addressing the core argument of both camps, that this crisis must end either in the deflation or hyperinflation of dollar prices, or both. As FOFOA has argued, the present crisis will likely end in both hyperinflation and deflation at the same time. I agree with this analysis, but I disagree with his targets. Both hyperinflation and deflation of prices will occur, but they are likely to hit every ex nihilo currency on the planet except the dollar. If other currencies survive at all, they will do so only as boutique items marketed to private collectors, like their predecessor, gold. The deflationary/hyperinflationary hit will be not just socialized, but globalized as well.
Is this argument true? I don’t know for sure. To be honest, there are so many variables in the current crisis that any attempt to make a firm prediction must end in embarrassment for someone — a whole lot of “someones”, in fact. But, let’s assess the probabilities determining the outcome of this crisis using Marx’s Law of Value, rather than Austrian economics:
Zero divided by zero equals ?
To be absolutely clear at the outset, there is no difference between the fundamental facts underlying the dollar and the fundamental facts underlying all other national currencies — they are all worthless and possess infinitely more purchasing power than their actual value. From the standpoint of the law of value, any exchange rate between any two ex nihilo currencies is meaningless, since it is merely the ratio between one object that is entirely worthless and another object that is entirely worthless. For the past decade, the purchasing power of the euro has risen against the dollar despite the absolute worthlessness of either currency. The Zimbabwe dollar is collapsing into hyperinflation, but not so far as to actually represent in circulation its actual value — a Zim$1.00 note has exactly the same value as a Zim$1,000,000,000.00 note (and exactly the same value as a one hundred dollar bill for that matter).
Likewise, prices denominated in any ex nihilo currency are meaningless, since they can never rise to actually reflect the values of the commodities which the ex nihilo money denominates. An increase in the purchasing power of an ex nihilo currency would, in any case, conceal the utter worthlessness of the currency. And as to the fall in the purchasing power of any currency, it suffices to state no matter how far the purchasing power of Zimbabwe dollars fall, Zimbabwe dollar denominated prices of commodities never reflect how worthless the currency really is.
What both the hyperinflationist camp and the deflationist camp need to explain is why, despite the absence of value of all ex nihilo currencies, no major currency was put back on the gold standard after Washington closed the gold window in 1971? Why was gold, despite its value as money, relegated to the basements of major central banks or the private collections of hoarders? Why was it necessary for all major trading nations to remove a commodity standard for the general price level from the world economy? The questions answer themselves: a commodity standard for the general price level is incompatible with an economy founded on capitalist social relations at this stage of its development — absolute over-accumulation. The rather stunning fact presented by gold is this: if prices of commodities were denominated in gold, no commodity would be “worth” the gold standard price quoted for it, i.e., the purchasing power of gold as money would be below its value as a commodity — a situation previously found only during over-production of commodities is now a permanent feature of the capitalist mode of production. It is this situation that initially drove gold from circulation as money, that compelled it to strip off its monetary form.
Without understanding this piece of the puzzle, it is not possible to understand the nature of the present crisis, which, despite appearing as the product of a massive accumulation of worthless debt threatening all existing currencies, is actually the cause of this accumulation of fictitious capital. It is futile to try to understand the current crisis by comparing the attractiveness of various existing or imagined alternative ex nihilo currencies on the world market, since each is worthless, and are as prone to sudden and unexpected hyper-depreciation of their purchasing power as the dollar — and which, moreover, owe their role as money to the fact the gold has ceased to be able to function as money. Since there is nothing about the currencies themselves that set them apart from each other or from the dollar, predictions about their respective fates as currencies must rest, not on the respective attraction of the currencies themselves, but solely on the material relation between respective national states — we must ignore the apparent differences in the purchasing powers of various ex nihilo currencies and delve into the actual economic relations between and among the various states.
World market prices versus existing prices
No matter the differences in the exchange rate between dollars and all other currencies, the following conditions hold: on the one hand, world market prices are denominated in dollars, while, on the other hand, the total sum of present prices throughout the world market as a whole are determined by the ratio of the total sum of currencies of every nation to the total quantity of commodities in circulation throughout the world market. If the dollar was the only currency in circulation there would be no difficulty with regards to world prices and existing prices — they would be identical. However, if we have two currencies — we will call them ex nihilo dollars and an ex nihilo “Rest of the World Currency” (rotwocs) — the situation is changed. Although the dollars and rotwocs are identical — i.e., both are worthless — in circulation the effect on the total sum of world market prices is the ratio between all ex nihilo currency in circulation (X dollars plus Y rotwocs) to the total quantity of commodities in circulation throughout the world market.
Despite this fact, world prices are determined by dollars alone, and under the following circumstances: the dollar is not accepted for all commodities because it is world reserve currency; rather, the situation is precisely the opposite: because it is universally accepted in exchange for any commodity, it is the world reserve currency. This means the dollar’s purchasing power is absolute, while the purchasing power of the rotwoc is only relative — the rotwoc can purchase any commodity whose price is denominated in rotwocs, but to purchase a commodity denominated in dollars, it must be exchanged for dollars before the transaction can be completed. If we assume the world market is divided into two zones — a dollar only zone and a combined dollar/rotwoc zone — of equal size, it is obvious that the existing stock of dollars can readily serve as means of purchase in the entire world market, while the existing stock of rotwocs can serve as means of purchase only in the rotwoc zone. The purchasing power of the stock of dollars is, therefore, twice that of the stock of rotwocs, i.e., there are twice as many commodities available to be purchased by dollars as there are by rotwocs.
It should be obvious now that the sum total of all other ex nihilo currencies provide no additional purchasing power to global demand — they are entirely superfluous. On the other hand, the dollar actually exchanges with all other ex nihilo currencies at a rate significantly below its purchasing power throughout the world market — even against ex nihilo currencies that are, at any given moment, appreciating in purchasing power against it. Since the purchasing power of any ex nihilo currency is not inherent in the currency itself, but depends solely on the total quantity of commodities available to be purchased by it, it follows the purchasing power of the ex nihilo dollar is not limited to the commodities available to be purchased in the dollar zone alone, but all commodities that are available to be purchased by it throughout the world market.
On the other hand, it should be equally obvious that the total sum of prices in the world market must be above world market prices. Since world market prices are here determined solely by the ratio of the total sum of ex nihilo dollars in circulation to the total sum of commodities in circulation within the world market, but the actual sum of prices is determined by the ratio between total sum of dollars in circulation plus the total sum of all other currencies in circulation (x dollars plus y rotwocs) to the total sum of commodities in circulation, any quantity of non-dollar national currencies in circulation above zero results in prices that are above world market prices.
The endpoint of this crisis
The question is how all this works out in the crisis as it is now unfolding. While I don’t have a crystal ball, I will attempt to outline a likely course.
As we have seen in this crisis, no matter how profligate the Fascist State is in its spending on a massive global machinery of repression, and on socialization of the losses of incurred by the failed economic mechanism, the more expenditures it undertakes, the greater the pressure on other national monetary authorities to tighten their own monetary policies in response — to impose naked austerity on their citizens, to further constrain domestic prices in the face of rising global prices. Rising global prices translate into a falling rate of profit in the non-dollar states. To offset this falling rate of profit, the domestic labor forces of the various non-dollar states must be squeezed still further, and the resultant surplus product exported. The profligacy of the Fascist State and the austerity regime of these non-dollar states are only two sides of the same process, feeding on each other, each reinforcing the other.
The two do not merely reinforce each other, however, they also act to make their opposite insufficient in resolving the crisis. Insofar as the profligacy of the Fascist State increases, the pressure on the non-dollar states toward domestic austerity increases, and with this also increases its exports. Insofar as exports increase, global overaccumulation is intensified and the world market settles even more deeply into depression. But, as we have already seen, with an ex nihilo currency regime depressions are now associated not with deflation of prices, but the inflation of prices — so actual prices rise still faster in response to domestic austerity.
A straight-line assumption of the crisis indicates constantly rising world market prices, combined with increasing austerity and monetary policy contraction of non-dollar states. However, living processes do not move in a straight line; in any event non-dollar currencies are likely to experience an existential endpoint — separately, or in groups — since the collapse of any one of them involves fewer complications than replacement of the dollar as world reserve currency. Moreover, replacing the dollar with another currency does not solve the problem that these non-dollar currencies are superfluous. Non-dollar currencies are likely finished; nothing in this crisis appears to offer them another fate.
The question provoked by the above is not “What is the fate of the dollar?” Nor, is it, “What is the fate of non-dollar currencies?” Rather, the real question posed by my analysis is this:
“Why should any of these worthless currencies survive?”
I know I promised to examine John Williams’ argument that hyperinflation hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. I will return to this point. But, before I do, I want to respond to Neverfox, who asked me to evaluate the argument of the writer FOFOA’s theory of the imminent hyperinflation catastrophe:
To summarize the argument of John Williams: The economy is spiraling into a severe depression of the 1930s or 1970s type. To meet its various present public obligations, future promises, and prop up the economic mechanism — which, for the moment, we can call debt-driven economic growth — the Federal Reserve is forced to monetize Washington spending. This monetization is itself producing a collapse in the credibility of the dollar. Sooner or later this loss in credibility will result in the outright rejection of the dollar as world reserve currency, triggering a hyperinflationary depression. In the course of this hyperinflationary event, lasting about six months or so, the dollar will become worthless.
To a great extent, although differing on some subtle points with Williams, FOFOA throws light on Williams’ own thinking. In FOFOA’s description of events, the hyperinflation event is front loaded with the essential dry tender: the accumulation of fictitious assets denominated in dollars over an 80 year period produced as a by product of the economic mechanism — debt fueled economic expansion. The event is triggered by a collapse of debtors’ ability to make good on their debts. This, in turn, is followed by an attempt by the Fascist State to rescue the financial institutions on whose books the fictitious assets reside, which produces a loss of confidence in the currency and its rejection as world reserve currency. It is only at this point, government begins printing money to survive and pay its obligations, generating the onset of extremely rapid price increases and the core hyperinflation event..
A deflationary episode can, and probably will, proceed the actual hyperinflation of prices. The hyperinflation episode does not invalidate the arguments of those who predict a deflationary depression; in fact, the hyperinflationary episode will in all likelihood start out as a deflationary episode. Those predicting a deflationary depression, however, miss the response of the Fascist State. Moreover, the deflation does occur just as those who predict deflation assert; only the deflation takes place in gold terms, not dollar terms. Expressed in gold terms, it is a deflation; however, in dollar terms, it is a hyperinflation. FOFOA believes the difference between a deflation measured in gold and a deflation measured in dollars is key to understanding the hyperinflation that is imminent:
“What’s the difference between a deflation denominated in gold versus dollars?” Well, there’s a huge difference to both the debtors and the savers. In a dollar deflation the debtors suffocate but in a gold deflation they find a bit of relief from their dollar-denominated debts. And for the savers, the big difference is in the choice of what to save your wealth in. This is what makes the deflationists so dangerous to savers.
A deflation imposes an extremely heavy burden on debtors, requiring them to repay their debts with ex nihilo denominated debt whose purchasing power is increasing, and which, therefore, requires increasing amounts of effort to repay. By contrast, a hyperinflation reduces the burden of accumulated debt by depreciating the purchasing power and burden of ex nihilo denominated debt. In the thinking of those predicting deflation, as the debt bubble of the last 80 years bursts, the Fascist State will find it impossible to reflate the debt bubble and will be forced to accept deflation. Thus, a full scale debt deflation depression is in the offing.
FOFOA argues that while it is not possible to reflate the debt bubble, the Fascist State can save the paper assets of financial institutions that are the fictitious claims on these debts. Decades of debt fueled growth has swollen dollar-denominated assets held by these institutions to fantastic dimensions. FOFOA argues the Fascist State will not and cannot let these institutions fail because it is merely the political expression of these financial institutions. The aim of Fascist State intervention is not to save the debtors — which it cannot do even if it wanted to — but, as events of the last three years show dramatically — the Fascist State aims to save the the assets of these institutions. FOFOA quotes another writer from whom he derives his own name, FOA:
hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today’s dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)
The process of actual hyperinflating prices begins with the attempts to monetize bad debts — to socialize the losses of big capital — not with money printing; the money printing only begins in earnest once monetization of bad debt leads to a loss in the credibility of the dollar.
…it is the US Govt. that will make sure this becomes a real Weimar-style hyperinflation when it forces the Fed to monetize any and all US debt. And as dollar confidence continues to fall, that’s when the debt must go exponential just to purchase the same amount of real goods for the government. One month the debt will be a trillion, the next month it will be a quadrillion just to buy the same stuff as the previous month. How long will this last? Less than 6 months is my guess.
According to FOFOA, on the balance sheets of the failed banks there now is more than enough reserves to fuel a sudden burst of hyperinflating prices should society suddenly lose confidence in the dollar. As this base is pulled into circulation by a general demand for goods in the face of rising prices, the Fascist State will be forced to begin printing money to cover its own obligations. Each month the amount of ex nihilo dollars needed to fill the same demand for government spending increases, and with this increase, the amount of new ex nihilo money created will increase. This compounding growth in the supply of ex nihilo currency will provide added impetus to the explosion of prices. The explosion of prices will not be contained short of a new monetary regime in which assets and debt are somehow tied to gold.
The problem is that the present monetary system, in FOFOA’s view, is that lending and saving both take the same form — either a gold backed system or an ex nihilo money system. FOFOA argues money lent out inevitably dilutes the value of money being saved, since they both come out of the same pot:
The problem is that the expanding money supply due to lending always lowers the value of a unit of currency. Even if it is gold. If I loan you a $1 gold money, you now have $1 gold and I have a $1 gold note. The money supply has just doubled, and the value of $1 gold just dropped in half.
This is a fact of money systems. We can try to get rid of it by outlawing lending, but that is like outlawing swimming in the summertime, or beer drinking.
The solution is quite simple. And I didn’t come up with it. The problem is that at the point of collapse, some of the savers are wiped out, whether gold money or fiat. Think about those at the back of the line during the bank runs of the 1930’s. They didn’t get their gold. They lost their money.
Today we don’t have this problem anymore. The guy at the back of the line gets all his money, it’s just worthless in the end. We solved the problem of bank runs (bank failures) but not the problem of value.
This problem, which is often referred to as debt deflation, is inherent in the prevailing monetary system, and will lead to financial crises even if the United States went back to a gold-backed dollar. He proposes instead to bring gold back into the money system, but within strict limits: split the functions of store of value and credit into two separate monetary systems — ex nihilo for lending, and gold for saving — so that ex nihilo currency lent out will indeed be diluted, but the gold-backed value of saving will freely rise to express this dilution:
The solution is that the monetary store of value floats against the currency. It is not the same thing that is lent! It is not expanded through lending and thereby diminished in value. Instead, as $1 is lent, and now becomes $2 ($1 to the borrower + $1 note to you the lender) and the dollar drops to half its value, the saver, the gold holder will see the value of his gold savings rise from $1 to $2.
I don’t want to get into the weeds on this proposal by FOFOA, since it is entirely beside the point of the examination of non-mainstream theories of the current crisis, and, in any case, a non-sequitur from the standpoint of capital. But, he inadvertently touches on a salient point for my examination: suffice it to say, capital is not and cannot be thought of as the accumulation of gold or any other commodity. It is the process of self-enlargement, or self-expansion, of the capital initially laid out in the capitalist process of production. At any given moment, this capital can take the form of money-capital, fixed and circulating capital, wages, and final commodities, but it is not identical with any of these momentary identities — it is relentlessly converted from one form to another constantly — both serially, and simultaneously in what, over time, comes to resemble a vast cloud of interrelated transactions — as it passes through the process of self-expansion. FOFOA’s proposal imagines the point of self-expansion is precisely what it is not: to assume the form of a hoard of gold — or any other store of value. This is true only insofar as we are thinking of capitals that are no longer capable of functioning as capitals — that are incapable of acting on their own as capitals, owing to the ever increasing scale of capitalist production, which renders these petty capitals insufficient to function on their own as capitals. Unable to operate on their own, they must be placed at the disposal of larger agglomerations of capital in order to continue functioning as capital, resulting in great stress for their owners, who now have to turn their otherwise lifeless hoards over to giant vampire squids of the Goldman Sachs type or cease being capitals at all.
This is, in part, what Marx meant by the concentration of capital, which is not simply the concentration of ownership of the means of production, but also the concentration of owners of capital who can continue to operate independently as capitalists. The existence of even very large savings does not permit these owners to operate independently as capitalists, given the scale of productive undertaking now required. Marx described the process 150 years ago:
A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour; required both for its exploitation generally, and for making the consumed labour-time suffice as the labour-time necessary for the production of the commodities, so that it does not exceed the average social labour-time required for the production of the commodities. Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises. The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.
FOFOA’s proposal seems to confirm my identification of the social base of the hyperinflationist camp: a motley collection of petty speculative minnows, who are desperately trying to avoid the predation of the very biggest financial sharks and vampire squids — not to mention the Fascist State itself, which represents the interests of these predatory vermin. The hyperinflationists as a group imagine the dollar has reached the end of the line. They imagine this will lead to a revaluation of gold and the creation of a new monetary system to replace the dollar, driven by the dissatisfaction of the majority of the planet with the monetary policies of the United States.
So, we need to move on and examine this thesis.
Even if we assume John Williams’ prediction of a hyperinflationary depression turns out to be correct — and the global economy is plunged into an apocalyptic nightmare as prices rise with blinding rapidity, while economic activity shudders to a standstill — his argument for this outcome is so defective as to merely represent the chimes of an otherwise broken clock for the following reasons:
First, his prediction rests on mere accounting identities, and assumes the Fascist State can be counted on, or forced, to observe these accounting identities. As a counter-argument, I offer the historical evidence of Washington’s behavior over the past 80 years, when it routinely ignored whatever accounting identities as were forced upon it by circumstances and left the rest of American society and the global population as pitiful bag-holders of worthless ex nihilo currency. Williams offers no argument why the Fascist State will act differently in this crisis. In all likelihood, Washington will effectively renounce its debts and continue business as usual — leaving China and other exporters to absorb the impact.
Second, Williams does not understand hyperinflation. His definition of hyperinflation is entirely defective, because he doesn’t realize ex nihilo currency is not made worthless by hyperinflation; rather, it is already a collection of worthless dancing electrons on a computer terminal in the Federal Reserve Bank. Ex nihilo currency was worthless the moment the Fascist State debased the token currency from gold in 1933 and 1971. Hyperinflation and inflation are not the more or less sudden depreciation of money, but the more or less sudden depreciation of the purchasing power of an already worthless money.
Third, Williams does not understand depression, and in particular the Great Depression. Depressions are produced by the overproduction of capital — whether this overproduction is momentary or persistent. They are characterized by a general surfeit of commodities, fixed and circulating capital, and a relative over-population of workers. These are periodic occurrences, owing their genesis not to simple fluctuations of economic activity, but to constraints imposed on consumption by the necessity that all productive activity is carried on, not with the aim of satisfying human needs, but for profit. All depressions result in the sudden devaluation of the existing stock of social capital, of the existing stock of variable and constant capital, which is the absolute precondition for the resumption of self-expansion of the total social capital.
Before the Great Depression, this last point always meant a rather pronounced and sudden deflation of prices. After the Great Depression, this devaluation is accompanied, not by a sudden and spectacular collapse of prices, but a sudden and spectacular explosion of prices. The event itself has not changed — it is still a devaluation of the total social capital. What has changed is the expression of this devaluation in a general fall in the price level. I argue the source of this change was the debasement of national currencies during the Great Depression.
What the three points made above tell me is that Williams and the growing community of hyperinflationists do not understand ex nihilo money; they do not understand how prices behave under an ex nihilo regime; and, finally, they do not understand why ex nihilo money was a necessary result of the Great Depression. They are an odd collection of petty speculative capitalists concerned only with preserving their “wealth” through what are likely to be very interesting times.
Understanding ex nihilo money
Like money in general, ex nihilo money, is not simply a “thing” — a currency without commodity backing — rather, it is a social relation that appears to us in the form of this thing. It is a social relation that takes the form of worthless currency because this social relation itself can only take the form of things. The social relation, of course, is a global social cooperation in the act of labor. Since, this social cooperation does not by any means result from conscious decisions of the members of society and proceed with their conscious direction, the requirements of this social cooperation impose themselves on the members of society as necessities — as the law of value, as the value/prices mechanism.
What is peculiar about ex nihilo money as a form of money is that the relation between value and price has been completely severed — the two most important functions of money have devolved on entirely different objects. By debasing the currency from gold money’s function as standard of price was completely severed from its function as measure of value. This much is acknowledged by the hyperinflationist, who place the blame for this separation on the Fascist State; however, historical research shows impetus behind this separation did not first appear as a matter of State policy, but as a matter of financial common sense.
Every depression begins with money exchanging for commodities below its value, or, what is the same thing, with the prices of commodities at their apex for the cycle. Prices near the top of the cycle rise to unsustainable levels, and the competition to dump commodities on the market under favorable price conditions gets fairly intense. Everyone is optimistic about the economic outlook, profits expand, credit flows freely, workers are hired, factories furiously churn out commodities around the clock, the stocks of goods begin to pile up in the warehouses. And, then, BOOM! — depression erupts just as wages, prices, profits and interest are at their highest, and the purchasing power of money is at its lowest.
As the disorder spreads, profits and prices collapse, credit is choked off, debtors default, factories grind to a halt, millions of workers are laid off… yadda, yadda, yadda — we all know the drill. Side by side with this disorder, money is with drawn from circulation. Gold money disappears into hoards, as capitals attempt to avoid the worst of the devaluation of the existing social capital. The competition at this point is not to see who can sell the most commodities, but who can avoid taking any of the losses that the social capital as a whole must suffer. While this total social capital must take the hit, which capitals actually take this hit is a matter of entirely other circumstances.
As Marx put it:
The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.
How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.
The total social capital is devalued; and, this devaluation takes place both in terms of the values of the capital — prices fall, etc. — and by a winnowing out of the players — some definite portion of the total social capital is pushed out of productive activity altogether. Capitals go bankrupt, factories are shuttered, the reserve army of the unemployed expands. At the lowest point in the ensuing depression, prices and profits have fallen to their lowest point in the cycle, while the purchasing power of money is at its highest point in the cycle. Assets can be snatched up at bargain basement prices, labor power can be had for a wage below its value. If the capitalist has survived the wash out, he stands to accumulate on a prodigious scale, since unemployed productive capacity is just laying around collecting dust.
There was one problem with this scenario during the Great Depression: the economy hit this point and just laid there like the decaying carcass of a beached whale; the condition for the “‘sound’ operation of capitalist production” were never restored, money just sat in hoards as investors, waiting out the crisis for better times, clung to their useless gold stocks for dear life. There was, as usual, a general over-accumulation of capital, i.e., an overproduction of commodities, an excess of fixed and circulating capital, and an excess population of workers, but these excesses were rather persistent. As with any general over-accumulation, it was not a matter of “consumer confidence” returning, but the necessary actual devaluation of the existing total social capital. Absent this devaluation, attempts to increase production would merely result in an over-supply that further forced down prices and profits. Under these circumstances, a portion of the existing stock of commodity money could not circulate until the devaluation of the existing stock of social capital had taken place.
So, it was not the Fascist State that expelled gold from circulation as money; rather, because gold money could no longer circulate as money, the Fascist State was forced to replace it with ex nihilo currency. The Fascist State debased the currency from commodity money, because the circulation of commodity money had already halted. This action was no American exceptionalism, however; within a short period of time all industrialized nations went off the gold standard domestically.
I want to emphasize an extremely important point here, a point that is vital to understanding the present crisis: going off the gold standard did not simply convert money into a worthless, debased, token — entirely fictitious from the standpoint of the law of value — it also changed the behavior of prices, i.e., the behavior of the purchasing power of the currency itself. On this basis alone the Fascist State could take control of the social process of capitalist production.
The behavior of prices under ex nihilo money
Ex nihilo money is not commodity money, it is not token money, it is not fiat money — it is an altogether different animal entirely. For instance, under a commodity money regime an over-accumulation of capital produced falling prices during depressions, while the purchasing power of the commodity money rose. As I will show, ex nihilo currency inverts this relation after the Great Depression — now prices denominated in the debased ex nihilo currency rise as economic activity contracts, while the purchasing power of the ex nihilo currency falls.
So far as I know, there is no instance of a commodity money suffering a hyperinflation. Hyperinflation does not render a currency worthless; rather, the currency is immediately rendered worthless during debasement from a commodity that can serve as standard of price. Debasement can result in hyperinflation, but hyperinflation is not the necessary result of debasement. Hyperinflation must be defined as the extreme and rapid depreciation of the purchasing power of a currency that is already worthless, that already has been debased. Historically, while hyperinflation follows the debasement of the currency from gold, not every debasement of currency from gold has led to hyperinflation. Hyperinflation is historically associated not with commodity money per se, but with ex nihilo currency.
Here a distinction must be made between money — the commodity which performs the function of universal equivalent — and ex nihilo currency, which has no relation to commodity money at all. While this ex nihilo currency can replace commodity money in circulation like token money under certain definite circumstances, what makes it different from token money is that it has no definite relation with a commodity that serves as money — it is not “honest” money, i.e., tokens whose purchasing power is held within limits governed by the laws governing the circulation of commodity money. However, like the circulation of tokens of money, ex nihilo currency is subject to certain laws, the most important of which is it can only represent in circulation the value of the commodity money it replaces.
When we speak of the purchasing power of ex nihilo money, we are in fact only referring to the quantity of commodity money this ex nihilo currency actually represents in circulation. In this case, the commodity money on which I base my discussion is gold; so, the purchasing power of an American ex nihilo dollar represents the quantity of gold having a price of one dollar. If gold has a price of $22.67 an ounce, the purchasing power of one ex nihilo dollar is equal to the value of 0.044 ounce of gold; if gold has a price of $1525, the purchasing power of an ex nihilo dollar is equal to 0.0006557 ounce of gold. If the price of gold falls from $800 per ounce to $250 per ounce, the purchasing power of ex nihilo currency has risen from 0.00125 ounce of gold to 0.004 ounce of gold. If the price of an ounce of gold rises from $250 to $1525, the purchasing power of ex nihilo currency has fallen from 0.004 ounce of gold to 0.0006557 ounce of gold.
In any case, the purchasing power of ex nihilo currency refers only to the quantity of gold that would otherwise be in circulation circulation had not it been replaced by ex nihilo currency. It does not refer to the purchasing power of ex nihilo currency in relation to any other commodity. But, the quantity of gold in circulation at any point is not given — at one point it may be higher, while at another point it is lower. If, despite these fluctuations, the amount of ex nihilo currency in circulation is unchanged, it will, in the first case, represent more commodity money, and, in the latter case, represent less commodity money. The purchasing power of the ex nihilo currency will rise or fall with the fluctuation of economic activity which it denominates in itself. Since, when actually in circulation, the currency of commodity money is only a reflex of the circulation of commodities — rising and falling with this circulation — the purchasing power of the ex nihilo currency will only represent this quantity of commodity money irrespective of the absolute quantity of ex nihilo currency in circulation.
The circulation of commodity money is only a reflex of the circulation of commodities. Assuming the value of commodities and the velocity of money are fixed, when the circulation of commodities increases, the quantity of commodity money in circulation must increase. When the circulation of commodities decreases, the quantity of commodity money in circulation must decrease. Consequently, a fixed quantity of ex nihilo currency will represent a larger or smaller quantity of commodity money respectively as economic activity expands or contracts. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is increasing, the purchasing power of this fixed quantity of ex nihilo currency must increase. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is decreasing, the purchasing power of this fixed quantity of ex nihilo currency must decrease.
The supply of commodity money and the supply of ex nihilo currency are not the same thing. While the circulation of commodity money is naturally driven by economic activity, the amount of ex nihilo currency available to circulate is always dependent on the State issuance of ex nihilo currency. Moreover, once ex nihilo currency is in circulation, it will tend to remain in circulation. Thus, while the quantity of commodity money in circulation rise or falls with the circulation of commodities, the purchasing power of the ex nihilo currency replacing commodity money tends to increase or decrease with the circulation of commodities instead. For this reason, ex nihilo currency presents us with the paradox that prices tend to fall as economic activity increases and rise with the fall in economic activity.
If all else is given, we are forced to the following conclusion regarding the purchasing power of ex nihilo currency :
- the purchasing power of ex nihilo currency rises during periods of economic expansion, i.e, a given quantity of ex nihilo currency can purchase a greater sum of values. This is precisely the opposite of what we would expect from commodity money. While,
- the purchasing power of ex nihilo currency falls during periods of economic contraction, i.e, a given quantity of ex nihilo currency can purchase a smaller sum of values. Again, this is precisely the opposite of what we would expect from commodity money.
The behavior of prices are the inverse of what we would expect if ex nihilo currency behaved like commodity money. With commodity money, we should expect to find commodities being over-valued during expansions and devalued during periods of contraction. But. with ex nihilo currency, we find instead that commodities are devalued during expansions and over-valued during periods of contraction. Prices denominated in ex nihilo currency fall during expansions and rise during contractions.
When an economic contraction takes place, the sum value of commodities in circulation falls; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money too must fall. A given supply of ex nihilo currency now represents the value of a smaller quantity of commodity money. The values expressed by commodity prices fall, or, what is the same thing, a given value is expressed in higher ex nihilo currency prices. On the other hand, when an economic expansion takes place, the sum value of commodities in circulation rises; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money must rise as well. A given supply of ex nihilo currency now represents the value of a larger quantity of commodity money. The values expressed by commodity prices rise, or, what is the same thing, a given value is expressed in lower ex nihilo currency prices. The result is that, absent a commodity to serve as standard of prices, prices denominated in an ex nihilo currency will tend to rise during periods of economic contraction, but fall during periods of economic expansion.
Moreover, in a pure ex nihilo money economy where no commodity serves as standard of prices, prices of commodities are subject to disturbances in the ratio of the existing supply of ex nihilo money in circulation and the quantities of commodities in circulation that are denominated in the ex nihilo currency.
- Should the quantity of commodities in circulation suddenly increase, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly decrease. Should the quantity of commodities in circulation suddenly decrease, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly increase.
- Should the supply of ex nihilo money in circulation suddenly increase, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly rise. Should the supply of ex nihilo money in circulation suddenly decrease, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly fall.
In either case, the sum of prices are not related to the sum of values of commodities, but only to the ratio of the sum of ex nihilo money to the sum of commodities in circulation. In fact I question whether money exists at all. Insofar as money function as a measure and store of value, it cannot circulate within society; insofar as is circulates within society and serves as a standard of prices, it cannot be a measure of value. What is left after the debasement of money is money, the social relation, irretrievably broken.
Actually, we’ve been in a depression since 2001
Whatever the outcome of the present crisis, John Williams’ prediction rests on such a defective theory of money and ex nihilo price formation that his prediction is useless to us. Ex nihilo money appears to allow the formation of so-called monopoly pricing in the economy. By restricting production, monopolies can, in fact, pad their profits, even as society descends into abject scarcity and want under an ex nihilo monetary regime. Rising prices during a depression is not a defect of an ex nihilo monetary regime, but the way prices would be expected to behave under that regime as capital is devalued. From the standpoint of the capitalist mode of production, inflation of ex nihilo prices is to be expected, and is the expression of the mode’s attempt to establish the sound basis for its future operation.
When I look at gold prices, I find evidence that the economy actually has been in a depression since 2001. According to my figures, gold prices bottomed in 2001 at around $271.04, and have been rising steadily for most of the decades after this. This is the first time gold prices have risen so consistently since the 1970s great depression/great stagflation. It follows from this that Williams’ depression, at least, has nothing to do with a hyperinflation of prices itself. At the same time, hyperinflation, in his model, does not coincide with a depression, but hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. To this we will turn next.
I am examining John Williams prediction of an imminent hyperinflationary depression published in March, 2011. Williams’ prediction appears to rest on a rather questionable hypothesis that this hyperinflationary depression is made inevitable by mere accounting identities — that is, by the logic of book-keeping, which suggests the Fascist State will be unable to stop a spiral into depression by depreciating the purchasing power of the US Dollar. Efforts to depreciate the dollar, Williams argues, will lead the world to reject the dollar as world reserve currency; setting into motion a series of events leading to it becoming worthless.
I am a bit skeptical on this point for no other reason than I saw the fate of Argentina when it could no longer pay its bills in 1999. I am forced to ask, since the US had not the slightest sympathy for Argentina in 1999, why would it have any sympathy for its own creditors in 2011? Indeed, Washington showed no hesitation in 1933 when it came to dispossessing society of its gold stocks, nor did it hesitate to close the gold window and renounce its obligations under the Bretton Wood agreement in 1971.The Fascist State sets the rules; there is nothing in the historical record to suggest it observes these rules except when those rules favor it.
Nevertheless, I want to give Williams the benefit of the doubt on this. So, I will continue to examine his argument.
Williams on Deflation, Inflation, Hyperinflation and Prices
Williams assumes the standard definition of inflation: a general rise in the prices of commodities. As is typical of this view, he completely neglects both consumption and production of commodities in his definition of inflation. He further defines hyperinflation as a particularly virulent form of inflation where prices rise multiple — hundreds or thousands — times a normal inflation.
Inflation broadly is defined in terms of a rise in general prices usually due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to consumer goods and services, not to the pricing of financial assets, unless specified otherwise. In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II, in the dismembered Yugoslavia of the early 1990s and most recently in Zimbabwe, where the pace of hyperinflation likely was the most extreme ever seen.
As is the standard thinking on the issue, Williams believes the most significant force behind dollar hyperinflation is the creation of money ex nihilo by Washington, not over-accumulation of capital. While inflation is a moderate expression of the chronic tendency of states with fiat currency to live beyond their means, hyperinflation is only an extreme expression of this chronic tendency.
The historical culprit generally has been the use of fiat currencies—currencies with no hard-asset backing such as gold—and the resulting massive printing of currency that the issuing authority needed to support its spending, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.
Excessive money creation takes the form of spending by the state that is otherwise unable to borrow from or tax society to the extent needed to fund its operations. In this case, the chief causes identified by Williams are unfunded promises in the form of social programs like retirement, health care and the social safety net, combined with the costs of bailing out the failed economic stabilization mechanism. (Missing, of course, is any reference to either service on the existing public debt, or spending on a massive global machinery of repression.) The point, however, is pretty much unoriginal: inflation begins with government spending, not over-accumulation of capital.
Deflation is simply defined as the opposite of inflation, i.e., “a decrease in the prices of consumer goods and services, usually tied to a contraction of money in circulation“; Hyperinflation is an “extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless.” Thus all three — inflation, deflation and hyperinflation — are merely state driven monetary phenomenon; the result of changes in the supply of money in circulation within the economy provoked by state spending. The source of the changes in the money supply are said to be state monetary and fiscal policy.
However, with regards to hyperinflation, Williams adds one additional, critical, definition, not with regards to prices, but with regards to the currency itself: it becomes worthless. In Williams’ opinion, the currency becomes worthless as a result of rapidly escalating prices. However, both logically and historically the case is precisely the opposite: prices escalate rapidly because the currency is already worthless — because it has already been debased from gold or another money commodity. With the currency debased from gold, prices became a creature of state monetary and fiscal policy pure and simple. Moreover, with the currency worthless as a result of its debasement, prices and their movements no longer transmit meaningful information about market conditions as is generally assumed to be the case.
Williams on Recession, Depression and Great Depression
Williams outlines a similar set of definitions with regards to recession, depression and great depression.
Recession: Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor… Depression: A recession, where the peak-to-trough contraction in real growth exceeds 10%. Great Depression: A depression, where the peak-to-trough contraction in real growth exceeds 25%. On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II—as officially reported —have been recessions.
Williams defines recessions, depressions and great depressions by levels of economic activity. In contrast to his previous definitions for inflation, deflation and hyperinflation, he focuses not on price, but actual output of goods and services. In discussing inflation, deflation and hyperinflation, Williams makes no reference to the general level of production and consumption of commodities; likewise, when discussing recessions, depressions and great depressions, he makes no reference to the general level of prices. But, both recessions and depressions are associated with definite changes in the level of prices in the economy. Historically, depressions clearly have been associated with deflations, or a general fall in the prices of commodities; while recessions clearly have been associated with inflation, or a general rise in prices of commodities.
The significance of this association is revealed if we assume great depressions are associated with hyperinflations — a hyperinflation not understood in the sense of breathtaking annual increases in the price level, but with the currency becoming worthless. Is there a basis for making such an equivalence? Remember, Williams asserts that historically hyperinflation is associated with fiat currencies — currencies that are not backed by some commodity that serves as a standard for prices. These are also currencies that can be created ex nihilo by the state. He associates hyperinflation not just with the general price level rising at a fantastic rate owing to the inability of the state to pay its obligations, but with the nature of the money used to pay those obligations — that is, with the fact that these currencies are not backed by gold or another commodity. It is important to remember in this regard that the US and all industrialized powers debased their monies during the Great Depression. But, just as important, the US also reneged on its obligation to pay its international debts in gold in 1971 — thus imposing on other nations a world reserve currency that was as worthless abroad as it was domestically.
For whatever reason, writers like Williams confuse the issue by treating debasement of the currency and hyperinflation as one and the same thing. In actuality, debasement of the currency — that is, the separation of the currency and gold — has been the signal monetary event of the post-Great Depression period. Hyperinflation — the rapid collapse of the purchasing power of a debased currency — is an entirely rare event. It is not rapidly rising prices that render money worthless, rather, because the money in question is already worthless prices can, under certain circumstances, rise at a fantastic rate.
How is this related to recessions and depressions? Before the Great Depression, and the debasement of the currency, depressions usually resulted in deflations. During the Great Depression, however severe and unprecedented deflation was interrupted by the debasement of all major currencies. In this debasement currency was rendered worthless, i.e., without any definite relation to a commodity which might serve as a standard for the general price level. The definition of worth being simply the dictionary definition of an equivalent in value to a sum or item specified, i.e., a specific quantity of gold or some other money commodity. Gold gave token currency its worth, that is, gave it some definite equivalent to other commodities which could be expressed as prices of those commodities in units of the money. After the Great Depression, and the 1971 abrogation of the Bretton Wood agreement, with money having no definite worth, depressions are now associated not with rapidly falling prices, but with rapidly rising prices — a condition that has been labeled recession.
The economic picture is cleared up once we realize the general price level is irrelevant for analyzing depression-type events after the dollar was debased. Precisely because money was rendered worthless by its debasement, prices, after this debasement, provide little useful information on the actual state of the underlying economy. Prices, at this point, are serving an altogether different function: they are an instrument of state economic policy. On the other hand, hyperinflation of prices does not lead to a worthless currency; instead, the debasement of the currency is a necessary precondition for hyperinflation.
Williams’ historical examples of hyperinflation
While a debased, worthless, currency can lead to hyperinflation, it is obvious that every debasement of the currency does not end in hyperinflation. Today, almost all national currencies are debased, yet hyperinflation occurs only rarely in history. Moreover, the extraordinary hyperinflations of history do not result primarily from the profligacy of the state. The United States, for instance, is by far the most profligate state in history — accounting for nearly half of all military spending. What triggers hyperinflations are definite economic circumstances in addition to this state profligacy.
The economic conditions leading to hyperinflation can be seen most clearly if we compare the current economic environment to historical examples of hyperinflation cited by Williams. Williams’ examination of examples of hyperinflation suffer from defects along the lines of his examinations of inflation/deflation and recessions/depressions. However, while he overlooks obvious connections in the latter cases, in the case of historical examples of hyperinflation he overlooks obvious differences.
Williams recounts the case of the Weimar Republic:
Indeed, in the wake of its defeat in the Great War, Germany was forced to make debilitating reparations to the victors—particularly France—as well as to face loss of territory. From Foster (Chapter 11):
By late 1922, the German government could no longer afford to make reparations payments. Indignant, the French invaded the Ruhr Valley to take over the production of iron and coal (commodities used for reparations). In response, the German government encouraged its workers to go on strike. An additional issue of paper money was authorized to sustain the economy during the crisis. Sensing trouble, foreign investors abruptly withdrew their investments.
During the first few months of 1923, prices climbed astronomically higher, with no end in sight… The nation was effectively shut down by currency collapse. Mailing a letter in late 1923 cost 21,500,000,000 marks.
The worthless German mark became useful as wall paper and toilet paper, as well as for stoking fires.
Germany suffered defeat in a war that left it exhausted and stripped of territory, population and productive capacity by the victors to pay for reparations; it was the scene of intense class conflict and intense economic dislocation. The hyperinflation of the Weimar Republic Germany, therefore, began not with absolute over-accumulation of capital — with overproduction of commodities and a surfeit of labor power — but decidedly the reverse: a massive loss of productive capacity — a loss the government then tried to paper over, without success, by issuing worthless paper. The government sought to stabilize the economy by printing money to offset these crippling economic losses. The subsequent explosion of prices occurs not merely because the Weimar Republic sought to paper over a disaster, but because it was not possible to paper over such catastrophic material losses with money printing. The lesson of the Weimar Republic is obvious: while debasement of the currency can artificially inflate the purchasing power of state issued token currency, it must ultimately fail in an explosion of prices if the state attempts to paper over real material losses.
Where in this litany of disaster are conditions similar to those faced by the United States? Despite Williams’ assertion that, “The Weimar circumstance, and its heavy reliance on foreign investment, was closer to the current U.S. situation…“, in fact, the two have nothing in common. While Germany was systematically stripped of its productive capacity, the US is experiencing capital flight caused by decades of debt-driven inflationary domestic policy, including not only social spending “to assuage social discontent,” but also thoroughly wasteful and excessive national security expenditures and a failed economic stimulus mechanism.
Moreover, it is not merely a question of foreign investors propping up the dollar. While Germany’s ex nihilo currency was not considered money beyond its borders, the dollar is the world reserve currency; commodities world wide are priced in dollars. At the same time, the United States accounts for a quarter of global consumption demand, and this demand takes the form of ex nihilo dollars exclusively. The global producers of commodities are facing severe over-accumulation of capital and insufficient money-demand for their output. They are looking precisely for currencies with the sort of excess money-demand that is typical of inflation driven growth economies. The question is not whether trillions of dollars of social wealth denominated in dollars can withdraw from the dollar in time should there be a crisis; rather, we have to wonder if any exit from the dollar is possible or probable.
I took some times off to really dig into the competing theories of the present crisis and to see if redwoods are really all that much of a big deal.
- There are a lot of theories about this crisis.
- Most of them are worthless, and
- Redwoods are really huge — I mean HUGE!
John Williams and the imminent hyperinflationary depression
I want to begin this series of posts on various non-mainstream theories of the present crisis by examining some of the assumptions and definition proposed by John Williams, economist at the website Shadow Government Statistics, in his prediction of an imminent hyperinflationary depression. Williams is serious about his prediction — up to, and including, warning his readers to store guns, ammo, gold and six months of basic necessities.
In his recently published special report, Williams — a self-described conservative Republican economist, with libertarian leanings — advances a number of questionable arguments typical of theories of the current crisis floating around out there. The most significant of these questionable arguments is Williams’ assertion that the crisis begins with an unsustainable fiscal and monetary environment, not with over-accumulation. Despite the jarring nature of his prediction, for Williams’ an imminent hyperinflationary depression results purely from rather boring accounting identities:
By 2004, fiscal malfeasance of successive U.S. Administrations and Congresses had pushed the federal government into effective long-term insolvency (likely to have triggered hyperinflation by 2018). GAAP-based (generally accepted accounting principles) accounting then showed total federal obligations at $50 trillion—more than four-times the level of U.S. GDP—that were increasing each year by GAAP-based annual deficits in the uncontainable four- to five-trillion dollar range. Those extreme operating shortfalls continue unabated, with total federal obligations at $76 trillion—more than five- times U.S. GDP—at the end of the 2010 fiscal year. Taxes cannot be raised enough to bring the GAAP- based deficit into balance, and the political will in Washington is lacking to cut government spending severely, particularly in terms of the necessary slashing of unfunded liabilities in government social programs such as Social Security and Medicare.
This crisis, Williams explains, could be avoided if the US were to raise taxes sufficiently, or reduce spending accordingly, or some combination of either; however, these solutions are not possible for purely political reasons. To resolve this impasse, Washington has turned to inflating prices instead.
Key to the near-term timing [of an outbreak of hyperinflation] remains a sharp break in the exchange rate value of the U.S. dollar, with the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets. The current U.S. financial markets, financial system and economy remain highly unstable and increasingly vulnerable to unexpected shocks. At the same time, the Federal Reserve and the federal government are dedicated to preventing systemic collapse and broad price deflation. To prevent any imminent collapse—as has been seen in official activities of the last several years—they will create and spend whatever money is needed, including the deliberate debasement of the U.S. dollar with the intent of increasing domestic inflation.
This response has, in turn, provoked a reaction from the world community that will lead to a rejection of dollars and dollar denominated assets, a circumstance that must end in hyperinflation and depression.
The damage to U.S. dollar credibility has spread at an accelerating pace. Not only have major powers such as China, Russia and France, and institutions such as the IMF, recently called for the abandonment of the U.S. dollar as the global reserve currency, but also the dollar appears to have lost much of its traditional safe-haven status in the last month. With the current spate of political shocks in the Middle East and North Africa (a circumstance much more likely to deteriorate than to disappear in the year ahead), those seeking to protect their assets have been fleeing to other traditional safe-havens, such as precious metals and the Swiss franc, at the expense of the U.S. currency. The Swiss franc and gold price both have hit historic highs against the dollar in early-March 2011, with the silver price at its highest level in decades, rapidly closing in on its speculative historic peak of January 1980.
According to Williams, existing domestic fiscal commitments and further demands to shore up the current failed economic mechanism cannot be funded under existing political arrangements; these needs can only be satisfied by assuming creation of money ex nihilo by Washington; the assumption of increased ex nihilo money creation to fulfill existing commitments and shore up the failed mechanism is damaging the credibility of the dollar as world reserve currency; the loss of credibility should weaken the dollar and eventually lead to panicked dumping of dollar and of dollar-denominated paper assets, triggering hyperinflation.
When I follow this logic backward, the first question I encounter regards the panicked dumping of dollars and dollar-denominated assets. Assuming hyperinflation is triggered by panicked selling of dollars and dollar-denominated assets, for what is this currency and these assets to be exchanged? Who would step in to buy the assets when everyone else is selling them in a panic? In theory, the Federal Reserve can step in to buy treasuries, but it can only offer dollars in exchange for the treasuries. Other assets, since they are denominated in dollars, can only be exchanged for dollars. Moreover, if the sellers have dollars to dump, they can only use these dollars to buy other currencies, precious metals, or commodities. If they use the dollars to buy other currencies, the dollar’s exchange rate will fall. If they use the dollars to buy precious metals, the prices of the metals will rise. If they use the dollars to buy ordinary commodities, the prices of these commodities will rise still further. If Washington intends to inflate the general price level to fix its problems, creating at least the appearance of a selling panic on the dollar would be precisely the means of accomplishing this aim.
Moreover, what do the sellers of currencies and assets denominated in various currencies seek when it comes to selling? I can only assume they want what everyone else wants: to receive, in return for their asset, the greatest quantity of another currency for the one they are selling, or the greatest quantity of money in any currency for their asset. In a panic, however, the opposite situation obtains: they must accept massive losses on their currency and assets. If they want to sell dollars, for example, they would be selling these dollars for fewer euros. If they were selling euros, they would be selling euros for increasing amounts of dollars. In my assumptions, sellers tend to prefer situations where prices are rising for their commodities, not falling as is assumed under a panic selling situation.
A further problem exists: the dollar is the world reserve currency because world commodities are priced in dollars. To remove the dollar as world reserve currency requires the sellers of commodities to price their commodities in some other currency than dollars. If the dollar is weakening, the prices paid for commodities is rising in dollar terms. Against what currency are these commodities to be priced? Will they be priced in currencies where prices of the commodities are generally falling or currencies where the prices of commodities are generally rising? Assuming general over-accumulation of capital, sellers will be very interested in those currencies where prices are constantly rising not falling. Producers would appear to have a decided interest in seeing inflationary policies by the various national states.
Although Williams’ argues rapid inflation will induce holders of dollars to abandon it, he paints a bleak economic picture where the biggest problem is not rising prices but faltering demand:
Despite pronouncements of an end to the 2007 recession and the onset of an economic recovery, the U.S. economy still is mired in a deepening structural contraction, which eventually will be recognized as a double- or multiple-dip recession. Beyond the politically- and market-hyped GDP reporting, key underlying economic series show patterns of activity that are consistent with a peak-to-trough (so far) contraction in inflation-adjusted activity in excess of 10%, a formal depression (see Recession, Depression and Great Depression). The apparent gains of the last year, reported in series such as retail sales and industrial production, should soften meaningfully in upcoming benchmark revisions. The revised patterns should tend to parallel the recent downside benchmark revision to payroll employment, while the July 2011 annual GDP revisions also are an almost certain bet to show a much weaker economy in recent years than currently is recognized in the markets. (See Section 4—Current Economic and Inflation Conditions in the United States.) Existing formal projections for the federal budget deficit, banking system solvency, etc. all are based on assumptions of positive economic growth, going forward. That growth will not happen, and continued economic contraction will exacerbate fiscal conditions and banking-system liquidity problems terribly.
From Williams’ own analysis, economic conditions are worsening to levels not seen since the Great Depression. He is assuming that global sellers of commodities will face, in addition to weakening demand, increased liquidity problems created by a failed economic mechanism that previously was necessary to maintain economic stability in the face of absolute over-accumulation. If policy actions to reverse this situation are not sufficient to stabilize the global economy, what will be the result? From the point of view of economic policy the danger at this point seems not to be hyperinflation, but a rather pronounced deflation of prices. However, a more nuanced view of the situation is called for to confirm this conclusion.