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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 18, 2012 at 10:00 AM

The specter of hyperinflation

All this money the Federal Reserve “printed” to bail out the banks and prop up the economy must eventually swing back as hyperinflation, particularly if the central bank engages in another round of easing as growth slows further or stalls. So goes the argument of the likes of stock broker/gold bug/Austrian School investor Peter Schiff. Ron Paul and House budget boss Paul Ryan have voiced similar concerns. We have plenty to worry about, but is hyperinflation near the top of the list?

Throughout the turmoil of the past five years, Treasuries and the dollar have remained safe havens for world investors. A weaker dollar would actually help American exporters and, combined with modest inflation, would, oops, lower our debt to the People’s Republic of China. The actual problem the world has faced has been deflation. Inflation is nearly nil in America from a macro standpoint.

The high inflation that Americans of a certain age remember, the 1970s, was caused by two major events: The oil-price shocks and a Federal Reserve that lacked the will and political support to stop it for fear of raising unemployment. When Jimmy Carter appointed Paul Volcker as Fed chair, and Ronald Reagan backed him, he induced a severe recession that killed the inflation for a generation.

The famous hyperinflation in the Weimar Republic of Germany hit between 1921 and 1924. The main cause was the punitive Versailles Treaty ending World War I, where Germany was forced to pay reparations in gold or foreign currency. The weak Weimar government essentially inflated the mark to buy foreign currency, leading to a rapid devaluation and hyperinflation at home. Scholars still debate the causes, but those are the basics. The consequences of the hyperinflation may still guide Berlin in its policy, but the causes, as Keynes knew, were in the 1919 peace settlement.

Neither of these cases are operative here, now. This isn’t to be complacent. But the evidence just doesn’t support the gold-bug/Ron Paul fears. Anyway, if the dollar really melted down as the world currency, Treasuries became nearly worthless, etc., you’d have bigger problems than trying to buy a loaf of bread with that Krugerrand hidden in the cookie jar.

And Don’t Miss: The American model won’t work for Europe || Harpers

Today’s Econ Haiku:

Got degree, got debt

Got no luck with employers

Hired an H-1B

Comments | More in Deflation, Inflation

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