I have written extensively about our economic crisis over the last several years — in many articles, as well as in my book, Discipline. And much of that writing has been on the subject of inflation. But what is inflation, exactly?
The debate rages. Are we in an inflationary or deflationary environment? Are asset-classes rising in price, or falling in price? Over the last couple of years, so many of you have taken the time to remind me the collapse in housing prices alone mandate that we are experiencing massive global deflationary price pressure.
I still disagree, of course; the increase in the money supply — coupled with the lowest interest rates the globe has ever seen — conspire to create an extremely dangerous environment. Perhaps it’s true that some asset-classes have fallen in value — but that isn’t universal by any means. And perhaps the prodigious increase in the money supply and easing of credit offset some of the falling asset prices, but even if that is true, the balance isn’t sustainable.
And then there’s the velocity of money. You could argue that the copious money being printed isn’t getting to the economy because banks refuse to lend. There’s some truth to that — but it doesn’t change the fact that banks have to make money somehow, and the way they do that is by lending. Eventually they will have to start lending, and when that happens, it’s not going to be a quiet slow process; it’s going to be like a tsunami of cash hitting the economy.
Theoretically, the Fed could pick the precise moment to reverse policy — taking dollars out of the system. But economic indicators are almost all lagging, and by the time the Fed does realize it’s time to shrink the dollar supply, it will almost certainly be too late.
Beyond that, the Fed is now more than ever a political machine. Even if Bernanke knows the precise nanosecond he has to turn the ship around — and even if he were that skilled a captain — the question arises: would he would do it? The absolute best-case estimation of unemployment is still over 10%, and most private-sector economists agree that it’s much higher than that (probably more realistically over 20%). Do you really think the White House will allow the Fed to raise rates?
Here are my final thoughts: we know the hyperinflation of the Weimar Republic really did happen. We also know it happened in Argentina. We know it’s happening in Zimbabwe right now. It has happened countless times — to countless empires. Here are the real questions:
If printing and easing aren’t the causes of hyperinflation, then please tell us what is? If Argentina, for instance, didn’t destroy their currency by printing, then how exactly did they destroy it?