Where’s The Hyperinflation?

I keep seeing articles on news sites and news blogs, many of the of a financial or economic nature, of the next Weimar Republic and the prospect of hyper inflation.  It helps to know a little something of the history of the Great World War or WWI as many know it.  The prosecution of a war always causes inflation and the reason is simple, to conduct a war the government must compete for goods and services that would usually be the province of the consumer.  The first is the reduction of manpower available for industry, public service, and other normal employment activities.  So the first thing a conscription program does is to put pressure for good workers.  A draft can either be some sort of lottery or a wholesale conscription campaign.  Business may try and protect some workers through various deferment programs but generally, men are chosen without regard to their civilian occupations.

Then there is the competition for raw materials.  Where iron and steel production would be used to manufacture automobiles we would see a shift towards the manufacture of tanks and personnel carrying trucks.  There would be more demand for the manufacture of military ships along with an increase in merchant marine.  Aircraft production turns to war craft of various kinds.  On the other hand as more men are conscripted there are fewer buyers for automobiles and private aircraft.  Then there is the food production.  Men who serve in the military must be fed and they must be housed.  Bases must be built or expanded.  Nitrate production must be balanced between munitions and farming.  In general, one can see that the strain on resources increases the price ranges.  Government may decide to artificially set prices and wages so as to try and control any inflation that will always rise, but there are black market operations and this is a reliable measure for inflation.

With all this knowledge then it should come as not surprise that Germany, during the war years of 1914 through 1919 experienced inflation is the prices of many basic goods as well as many other non basic goods and services.  With the war settlements demanded by the Allies, paying for the cost of the war to other countries put a premium on collecting taxes, levying new taxes, and the diverting of commodities from the use in the German industry, a fair amount of coal and iron was transported to France and the other countries who won against the Germans.  All this did was to increase the rate of inflation.  The losses of agricultural lands to Poland and others meant that there would be a loss of food production.  And as many of the dead conscripts had come from farms then there were fewer who would return as farmers.  At any rate the nitrate stocks had been depleted and production was reduced.  For the German nation, along with Austria, inflation tended to increase because of the shortages that arose during the war years.

But hyper inflation is reaction not of creditors but of the general populace.  It reflects a lack of confidence in that country’s currency.  So the desire becomes one of spend to by assets as quick as one can.  As the currency declines in value the asset increases in value.  It is the shortage of confidence, not currency that is the problem.  As businesses and banks go bankrupt there is an increasing lack of confidence in the country’s economy.  What ever credit had been extended in the past to individuals, corporations, and governments, that credit is no being denied.  Remember, credit spends just as easily as money.  And it is a credit problem we now have in not only our country but many more.  So if the German and Austrian people were buying any and everything they could with the printed money they were being forced to accept then what we see is a bias for the acquisition of real and hard assets.  Hard assets can be exchanged on the barter market for goods and services.

So what do we have today in our financial markets?  We have what might be characterized as a hyper inflated asset market.  There is actually a shortage of what might be termed as safe investments that earn a decent return.  It is difficult for the average citizen to buy treasury bonds now and even if they wanted to do so the return is so excessively low that one ought to exclude such investments.  On the other hand there are other investments that can be made but most of those involve higher risk.  One could buy a house or two but that asset price is dependent upon the demand for it.  And unless one is wiling to be a landlord one does not collect an interest payment on that asset.  Indeed, one has to pay the property taxes for the privilege of owning that asset.  So housing is not a fungible asset like a treasury bond.  As for corporate bonds, well that asset is up in price.  The time value of money is debased.  one may find it very difficult to buy a very strong credit rated bond that will carry a coupon or more than 2 percent for twenty years.  And even so, one must usually pay a premium for the safer higher coupon rates.  Think of it this way, for a one thousand dollar bond the yearly coupon for one percent in interest is ten dollars.  If I have to pay one thousand and one hundred dollars for a bond that pays three percent, or a coupon of 30 dollars each year, then I have just given up part of my coupon payment.  If the bond has a ten year maturity then I would collect 300 dollars for that investment but I would have given away 100 dollars of it is the cost of the premium.  In other words I was lending my money and the coupon was an effective rate of 2 percent, not 3 percent.  Thus the bond as an asset has an inflated value, I pay more for receiving less.

Now there are many different types of assets in this world and they may not conform to what we believe assets to be.  A couple tons or copper sitting in your front yard is an asset.  That antique automobile is an asset.  Vintage wine is an asset.  And so on.  This is where we can see some of the problems of asset classes and inflation.  Some assets will suddenly deflate and their cost drops to next to nothing.  This would not be that much of a problem except for the fact that often such assets are purchased through credit, that stuff that spends just like real money.  So if you have a hundred tons of copper sitting in your front yard that you bought on credit for 400 dollars a ton and you can only sell that 100 tons of copper for 250 dollars a ton then you now have a problem.  Inflation has hit credit.  Inflation has made, through the intervention of the Federal Reserve system borrowed money very cheap and easy to obtain.  And once obtained then the loses due to unwise risk policies becomes inflated.  This is the hyperinflation, not the over printing of a paper currency.

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