Friday, November 18, 2011

Creating or Printing More Money - Why worry?

A medal commemorating Germany's 1923 hyperinflation. The engraving reads: "On 1st November 1923 1 pound of bread cost 3 billion, 1 pound of meat: 36 billion, 1 glass of beer: 4 billion."
It seems that people have in their genes, the notion of creating or printing more money is dangerous. It can create an uncontrollable inflation (what ever that is). And the only evidence that the people have in supporting their arguments are Weimar and Zimbabwe. Thus, it's make me wonder as to why people do not want to study the history and understand those two nations - why both nations had experienced a hyperinflation?!
 
Therefore, today's history lesson, we start off with the following links:
 
http://en.wikipedia.org/wiki/Occupation_of_the_Ruhr
 
http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

http://modernmoney.wordpress.com/2011/01/17/reasons-behind-zimbabwe-hyperinflation%C2%A0political/


So what did we found out?

It turns out that it was those pesky war reparations that caused Weimar government deficit spending to soar to something like 50 percent of GDP annually, with most of that whopping deficit spending used to sell the German currency and buy foreign currency to pay their war reparations. As expected, that drove their currency down the rat hole in short order, and kept driving it down, causing that famous bout of hyperinflation that did not end until that policy ended. And when all that ended and policy changed the inflation stopped dead in its tracks. In one day!!!!

How about Zimbabwe? Turns out they had a tad of civil unrest that dropped their productive capacity by about 80 percent, but government spending stayed high and too much spending power with too few goods and services for sale drove prices through the roof. Not to mention rumors of insiders using the local currency to buy foreign currencies for personal gain.

In all honesty, there must be circumstances to be happening first before a nation experience hyperinflation. The very specific circumstances are such as unwillingness or inability to impose and collect taxes - social and political upheaval, weak government, civil war, collapse of productive capacity or huge external debts denominated in a foreign currency or gold.

It is not creating or printing more money that leads to hyperinflation. It never had been and never will be.