The idea of hyperinflation is usually a joke to Americans. It’s the ultimate sign of a failed state — worthless currency combined with leaders who have no idea how to make that currency less worthless.
In 2008, for instance, “The Daily Show” did a bit on the economic crisis in Robert Mugabe’s Zimbabwe, a country that hit rock-bottom sometime in the 1990s and just kept on digging. It had been forced to issue currency that was worth 100 trillion Zimbabwe dollars per bill — but, as a reporter pointed out, a trillion bucks would only buy a few tins of baked beans and some tomatoes.
“A trillion dollars for baked beans?” Comedy Central comedian Lewis Black joked. “I didn’t know they had a Whole Foods in Zimbabwe!”
Zimbabwe’s new partner in hyperinflation is Venezuela, another failed state. As the power struggle between President Nicolás Maduro’s socialist government and opposition forces drags on and the country’s main industry — oil — continues to take a beating, its currency, the bolivar, has become essentially worthless, according to Bloomberg.
That’s why Venezuela is inching toward Zimbabwe, circulating notes worth 200,000 bolivars, 500,000 bolivars and 1 million bolivars, Bloomberg reported Sunday, noting that “The 1,000,000 note — the largest in the nation’s history — is worth only $0.53 cents.”
Whole Foods keeps on expanding, apparently. However, in the country of the upscale supermarket’s birth, we might have something to worry about ourselves.
No, the Treasury Department won’t be printing off trillion-dollar bills anytime soon. What should concern us, however, is the bills we’re issuing at the moment.
According to an October report in City A.M., a free, daily, business-focused publication in London, over one-fifth of all U.S. dollars ever created were created last year.
“Data from the Fed shows that a broad measure of the stock of dollars, known as M2, rose from $15.34 trillion (£11.87 trillion) at the start of the year to $18.72 trillion in September,” the outlet reported.
“The increase of $3.38 trillion equates to 18 per cent of the total supply of dollars. It means almost one in five dollars was created in 2020.”
This doesn’t mean Treasury Department printing presses are actually running off trillions of paper dollars. As City A.M. notes:
“Although it is often described as printing money, the Fed in practice creates digital dollars to buy up government bonds and other securities in the secondary market. The policy, known as quantitative easing (QE), aims to flood the markets with cash to keep borrowing cheap.
Physical or digital, it’s an unprecedented number of dollars. The situation is even more dire if you look at “M0,” another indicator of the dollars the country has created.
M2 takes into account a lot of different things — coins and bills in circulation, money in both checking and savings accounts, certificates of deposit, short-term bonds and other assets that are either liquid or, with some effort, could be converted into liquidity. There’s M1, which deals only with assets that are liquid or can be easily liquified. We’ll ignore that at present.
Instead, there’s a much narrower model of looking at the amount of currency we’ve created: M0. This only takes into account the Federal Reserve’s bank reserves and physical money directly.
City A.M. reported that M0 “rose from $3.44 trillion in January to $4.8 trillion in August, the latest available figures. That is a 28 per cent jump.”
This isn’t unusual in a crisis, at least not these days. The same thing happened during the financial crisis of 2008— and it didn’t lead to hyperinflation. The question is whether we dodge the bullet again.
According to City A.M., Andrew Hunter, senior U.S. economist at the London research and consulting firm Capital Economics, said the link between the money being created and inflation has been “pretty weak or arguably non-existent for a few decades now.”
“We had these same concerns back in 2008/9, that it was going to trigger a surge in inflation. Clearly that didn’t happen,” Hunter said.
One reason economists think we’re not going to see inflation — much less hyperinflation — is that the labor market isn’t going to be tight. Usually, full employment (or something close to it) is required for serious inflation, as Bloomberg noted.
“We think inflation is going to be muted because unemployment will still be high,” Michael Feroli, JPMorgan Chase & Co’s chief U.S. economist, told Bloomberg. “There will still be slack in the labor market, which would keep some pressure on wages.”
And yet, Bloomberg noted in its reporting on Venezuela that Maduro’s country also isn’t known for a tight labor market, either.
“As Venezuela’s economy shrank for a seventh straight year in 2020, the government turned a blind eye to a growing number of dollar transactions, kick-started by rolling power outages that prevented credit and debit card purchases and fostered the use of cash,” Bloomberg reported. “About 66% of transactions across the country are estimated to be made in foreign currency, according to Ecoanalitica.”
“While the dollar has gained ground, Venezuelans continue to rely on bolivar bills for public transportation and to purchase subsidized fuel. The Caracas subway recently issued an electronic payment system after it routinely stopped charging passengers due to cash shortages.”
And then there’s the other elephant in the room: The Democrats control both houses of Congress and the presidency and behave as creating making more money solves all problems. And who can blame them, with press like this?
Biden stimulus showers money on Americans, sharply cutting poverty in defining move of presidency https://t.co/MrzjVkZBEd
— The Washington Post (@washingtonpost) March 6, 2021
If a fifth of all money was issued in 2020, during the Trump administration, what’s going to happen when we’ve just passed a $1.9 trillion relief package that Democrats still don’t think was expansive enough? How are we to pay for that? We create more money — except that devalues the money we already have.
But think that’s all? Wait until you see the other spending the Democrats have in store. Is “Medicare for all” going to be on the table? What about an indefinite extension of the child tax credit? Expanded unemployment benefits? How do we pay for all of that?
We’re told we can tax the pants off the rich. If that fails, however, we can always create more money. And more, and more, and more …
We’d need a whole heck of a lot to turn into Maduro’s Venezuela or Mugabe’s Zimbabwe. However, the idea that hyperinflation is just a fantasy — that we’ve conquered the old myth that creating more money will end in inflation — is itself a fantasy. More of any resource eventually has to mean that resource is worth less — and that’s especially true of fiat money.
When Zimbabwe introduced those notes for 100-trillion Zimbabwe dollar bills in 2011, plenty of politicians and economists snapped them up, according to The Wall Street Journal — including then-Rep. Paul Ryan, who chaired the House Budget Committee at the time, and Stanford economist John B. Taylor.
“Each keeps one in his wallet, brandishing it at opportune moments as evidence of inflation’s most extreme possible ramifications,” The Journal reported. “‘No self-respecting monetary economist goes around without a 100-trillion-dollar note,’ Mr. Taylor says with a chuckle.”
No word on which politicians or economists are planning to get Venezuela’s new bolivar notes so they could brandish them “at opportune moments as evidence of inflation’s most extreme possible ramifications.”
It might hit a little close to home this time, however. After all, Forbes reported in August that by some models, our national debt will hit $78 trillion by 2028. With numbers like that, the joke may not be quite as funny anymore.
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