One
hears much discussion of hyperinflation on the gold web sites. It is a
worst case scenario and used to alarm and excite. It is used to
designate a period when prices are rising very rapidly, the favorite example
being Germany of 1914-23, and during this time prices rose by very close to
one trillion times. That is, a piece of bread which started off costing
1 mark ended costing one trillion marks. So it is not merely in
today’s world that we are using numbers above 1 trillion. But it
is an instructive period of history, and we must always keep in mind that
those who do not learn from history are doomed to repeat it.
The
last part of “hyperinflation” is “inflation,” and
this is perhaps the most important part (because it receives the least
comment). If we examine the word “inflation” as it is used
outside of economics, then it always means a going up. For example, one
inflates a balloon or an inner tube. Always it refers to something
which gets bigger.
This was not always the case. If we study the price rises
which occurred between the American Revolution and the Civil War (the rise in
prices associated with the continental during the Revolutionary War, the
price increase of the War of 1812 and the price increases in both North and
South during the Civil War itself) they are never called inflations.
They are always called depreciations. And depreciation has the exact
opposite meaning from inflation. It means a going down or a
getting smaller
Well,
what is going on? Is something getting bigger, or is something getting
smaller? Well, any writer who comments on the price increase of the
American Revolution will call it a depreciation, i.e., a getting smaller,
because the continental lost 99% of its value between 1776 and 1780.
This was universally regarded as a going down of the continental, not as a
going up of goods, because prices remained the same both in terms of the
English gold currency and in terms of the Spanish silver currency.
The
situation was the same during the War of 1812. The legal U.S. currency
at the time was the gold or silver dollar. This did not depreciate, and
prices did not rise in its terms (example, New England). Prices only
rose in terms of paper bank “notes” which circulated as
(unofficial) money in the central and southern states, and this is
universally recognized as a depreciation of these “notes.”
A similar situation existed during the Civil War because, although prices
rose through most of the North, California remained on the gold/silver
standard and had price stability. This was not an inflation. It
was a depreciation of the greenback.
After
the Civil War, there was a big debate about the legality of the paper
greenback. The dispute went to the Supreme Court, which ruled in 1870
that the greenback was not legal money and that only gold and silver coin
were a legal tender in the United States (Hepburn decision).
However, the paper money forces were trying to prevent a return to
gold/silver money; they did not give up but threw themselves into the battle
more intensely. The Hepburn decision was by a vote of 5-3.
This shows just how out of step the paper money forces were. Because of
the secession of the South, 4 judges had retired from the (8 man) Supreme
Court, and this gave Lincoln 4 appointees. One would have thought that
these were 4 solid votes for Lincoln’s greenbacks, and indeed he appointed
what he thought were 4 safe votes. First, the 4 old justices, who had
been appointed with no attention to their views on this issue, went solid for
gold/silver money. And second, Chief Justice Samuel Chase (after whom
Chase Bank was later named) deserted the Republicans. When Chase
studied the issue, he could not, in conscience, vote for the legality of
paper money in America. So he joined the Democrats even though he had
been Secretary of the Treasury under Lincoln and had issued the greenbacks
and ruled his own action (in so issuing) illegal. (Ah, yes, in the old
days people put country above party.)
The
Republicans, believing that paper money was popular and influenced by the
fact that Lincoln had been raised to hero status by his assassination,
created a 9th position on the Court. A Democrat retired from
old age, and this gave President Grant two appointments to the Court.
He used them to appoint two known paper money advocates. These tilted
the balance, and the new Court voted in favor of paper money 5-4 (Legal
Tender decision, 1871).
So
when a judge or a legal “scholar” tells you that the courts are
bound by precedent, you know that he is a liar and a fraud. In 1871,
the Supreme Court looked precedent right in the face and spit on it.
The Constitution was explicitly written to ban paper money. Even
the advocates for paper money at the Constitutional Convention of 1787 openly
stated that, if the proposed constitution passed into law, then paper money
would be permanently banned in America. (“The convention was so smitten
with the paper money dread that they insisted that the prohibition be
absolute.” See the debate at the Constitutional Convention, Aug.
16, 1787 in which an opening wedge for paper money was voted down by 9 states
to 2.)
After
their victory in the Court the paper money faction moved aggressively and
proposed that resumption (of gold/silver) be postponed. Congress
approved this measure in 1874. President Grant was going to sign this
into law, but upon reading it over for the last time before signing it, he
changed his mind and vetoed the postponement measure instead. (Yes, in
the old days politicians actually read bills before voting on them.)
Then
Congress returned home for the 1874 election and got the shock of their
lives. The country was soundly pro-gold. The Republicans did a
180º reversal and became the pro-gold party, which led to their
dominance for the next 6 decades, in particular the election of 1896.
During this time America became the most powerful economy in the history of
the world.
But
also during this time the basic language changed to call a general rise in
prices an inflation instead of a depreciation. This was a major victory
for the paper money forces because it allowed the argument that goods were
going up (instead of the currency going down) to be accepted by the
naïve. If goods were going up, then the fault must be with
goods. Therefore, let’s make a law against a rise in goods (as
the Emperor Diocletian did in the early 4th century). This
led to the collapse of the Roman economy and in turn the collapse of the
Roman Empire.
In
your next economic discussion, try the experiment of using the correct
concept and calling a rise in prices a depreciation of the currency instead
of an inflation of goods. Wham, things will turn around so rapidly that
you head will spin. All of a sudden the other fellow will see your
point and admit that the increase in money is crucial.
Take
the recent debate which has been going on in the internet sites since 2008 as
to whether the country is going to have “deflation” or
“inflation.” You have been following this debate and know
that there is a substantial opinion predicting “deflation.”
Here at the One-handed Economist we know that this is like a debate between
the math professor and the idiot from off the street who argues that 2 + 2 =
5. The “deflationistas” are going to lose, and the
subscribers to the One-handed Economist are going to take their money.
How
do we know this? Because they have been losing since the Civil
War. They have not only been losing in the United States. They
have been losing in every country in the world. Fortunately for us
these people have short attention spans. We beat them. We take
their money. Then they forget. Then we beat them again,
etc. Some people never learn.
The
astute commodity speculator can see the signs. Just this week the Nov.
CRB index went to a new relative high (above 500). Wheat broke out of a
triple bottom. Cocoa and coffee are rivaling gold in their quest for
new highs. The large depreciation of the currency which I predicted
after seeing the massive creation of money by the Fed in 2008-09 may be ready
to start here and now. It will start in commodities. Then it will
move to the Producer Price Index. And then it will move into the
Consumer Price Index. Then the newspapers will acknowledge it, and only
then will the “deflationistas” get scared and rush to buy
gold. This is what they did in 1979. Those who do not learn from
history are doomed to repeat it.
So
you see there is justice in the world. Through the One-handed
Economist you get rich via my advice. I get rich, both by taking my
own advice and by selling it to you. And the bad people of the world
lose their money to us. There is a harmony in the world if you can see
reality as it is and know how to take advantage of it.
I
usually shy away from predicting “hyperinflation,” partly because
inflation is the wrong concept (as above) but also because an extreme
depreciation of the currency is very rare. The favorite example is 1923
Germany. The worst case is Hungry, 1946. But we have a second
worst case recently in the country of Zimbabwe over the past decade. It
is a shocker.
year rate
of in-
crease
in prices
1999
56.9%
2000
55.22%
2001
112.1%
2002
198.93%
2003
598.75%
2004
132.75%
2005
585.84%
2006
1,281%
2007
66,212.3%
2008
231,150,888.87% (July)
In January 2009, the Zimbabwe
dollar ceased to circulate, and the current monies used in Zimbabwe are the
U.S. dollar and the South African rand. The Zimbabwe dollar came into
existence in 1980 at a value of $1.59 (U.S. dollar). Official statistics
for July 2008 put “inflation” at 231 million percent. In
November 2008, Professor Steve Hanke estimated Zimbabwe prices were rising at
89.7 sextillion percent annually. (A sextillion here in the U.S. is
1,000,000,000,000,000,000,000.) The official rate of unemployment is
95%.)
Von
Mises pointed out that, once a money expansion starts, it tends to accelerate
to the upside. This is because the paper aristocracy is in control, and
they need to crank the printing presses faster and faster to maintain their
profits. We saw the same thing in the U.S. in 2008 as Goldman Sachs
declared a crisis and got the Fed to massively increase the quantity of
money.
Over
the past decade, expected life-span in Zimbabwe fell from about 60 years to
about 40 years. It is impossible to conceive of such a thing without a
corresponding reduction in population, say from 12 million to 8
million. Such a reduction may have already occurred, but the official
Zimbabwe statistics do not admit it.
If
virtually no one in the country is employed, then Zimbabwe has returned to
the Stone Age, and people are getting their food by hunting and
gathering. A recent law forbade Zimbabweans from withdrawing from their
own bank account an amount of money greater than 25¢ (in U.S. dollars)
per day. The decisive event which brought an end to the depreciation
occurred when doctors and nurses walked out of the hospitals due to absurdly
low real pay, and the country was hit by a cholera epidemic. It would
not at all surprise me if 4 million Zimbabweans have died. Meanwhile,
Gideon Gono, the head of the Zimbabwe Central Bank and the man printing the
money, drives a 12 cylinder Mercedes Benz and lives in a 47 bedroom palace
down the street from dictator Robert Mugabe. His home has a swimming
pool, landscaped gardens and a gym bigger than many houses.
The
important thing to understand is that the theory behind the Zimbabwean
depreciation is exactly the same as the theory behind our depreciation here
in America. If Zimbabwe “stimulates” its economy and 4
million people die and the rest are driven back to the Stone Age, then how
can the exact same policies lead to anything but the same result in America?
To
show people how true knowledge of economics can help them make money in these
terrible times, I publish a fortnightly (every two weeks) economic letter
(which has been bullish on gold since 2002). This is the One-handed
Economist ($300 per year). You may subscribe by going to my website
and pressing the Pay Pal button, or you may subscribe by mailing $290 ($10
cash discount) to: The One-handed Economist, 614 Nashua St. #122,
Milford, N.H. 03055. The regular issues are dated every other Friday
and are posted on the site (password protected) on Sat/Sun. The most
recent regular issue is 8-6-10, and the most recent special bulletin is
7-29-10.
Oh, gold was hit in late July Please
listen close; I ring my bell
Al Abelson’s the reason
why. To
tell you they’re the last to sell.
Thank you for your interest.
Howard Katz
The Gold Speculator
Howard S. Katz is
the editor/publisher of the One-handed Economist, a financial letter which
combines fundamental and technical analysis. He was a bug on gold in the
1970s and became a bug on gold again in late 2002.
Subscribe to the Gold
Speculator (the One Handed Economist)
You can subscribe
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