RW hyper-inflation follies

[Kurt_and_Hunter]

Those who do not learn the lessons of history are doomed to repeat them. And those who don't learn the basic facts of history are doomed to be wing-nuts.

Cliche photos of Weimar Republic era Germans with wheelbarrows full of trillions of worthless Marks have become a staple of every right-wing TV show, usually labeled "Obama's plan for America" or some such thing. (How confusing... I thought it was Wiemar, like it sounds, but Wickipedia and Google say otherwise. But now DU's spell-check says "Wiemar"... aw, screw it. You know what Republic I'm referring to.)

Hyper-inflation is considered, by these wackos, to be the inevitable result of any government (run by a Democrat) increasing the money supply beyond levels warranted/demanded by output growth... or, for the extreme wing-nut, hyper-inflation is the inevitable result of paper money. (That must explain our terrible hyper-inflation here when we went off the gold standard during the Great Depressio... hey, wait a minute!) They prefer to overlook that fact that an even larger number of dollars have gone to money heaven in the last couple of years. Printing money = hyper-inflation... again, as long as a Democrat is in office. (Had Bush monetized the Iraq War it doubtless would have been hailed as super-clever.)

And God knows they love to overlook that all the money people are shocked into conservative tight-money practices yet are lining up to issue re-financed fixed rate 30 year mortgages at under 5%. Somebody needs to tell these banks about the looming hyper-inflation. Don't they watch Glen Beck?

Could Weimar Republic style hyper-inflation happen here? Sure... here's what would have to happen:

First, since hyper-inflation always seems to involve extrinsic forces larger than the host economy, the US economy would have to drop down to something a good bit less than the world's largest economy. That may take some doing since we are larger than any two economies combined and roughly the size of the entire Euro-zone.

Then the US would have to lose the largest war in history to somebody like, say, China. We're talking about a war for national survival with a whole generation of young men killed and the entire wealth of the nation squandered and everything just wrecked, not merely one of our expensive quasi-colonial adventures. During the war the US dollar would have to lose its position as the denominational currency for any commodity or respected international financial instrument. And America would have to lose any ability to borrow on sane terms.

After losing the war China could then hold us up for big reparations and demand payment in gold or Euros while everyone in the world stopped accepting dollars for much of anything at all.

Oh, and we would probably need to have enough 1920s-style leftists around to organize labor to the point it could credibly demand higher wages.

And our money supply would have to be controlled by some who isn't a neo-Freidmanite monetarist like Ben Bernanke.

OMG. Notice how many of those things have happened already!!! It's eerie...

(And, in case anyone is wondering, China cannot demand that existing US treasuries be paid in any form other than dollars.)

The bottom line is that we have precious little in common with the Weimar Republic except one thing... both 1923 Germany and 2009 America are beset by right-wing lunatics seeking to advance themselves by demagoguing economic hard-times.

[Warren Stupidity]

1. Weimar is not the only scenario.

If the dollar actually loses its status as the default currency of the planet instability is certainly a strong possibility.

[MercutioATC]

3. True...and the Euro actually makes more sense as the petrodollar

for many countries than the Dollar does.

That, combined with the inevitable inflation caused by placing so many dollars in circulation, doesn't bode well for us if we keep this course. Not Zimbabwe-style problems, but severe enough to have a serious impact.

[Turbineguy]

2. RWers know a lot about economics

that's why our economy is so fundamentally strong right now.

Or should that be fundiementally strong?

[MercutioATC]

6. Even a blind squirrel gets a nut occasionally.

Don't discount the message solely because of the source.

[denem]

4. The fact is that the first $750b of TARP money could have come from the Fed

and the second $1.2 trillion TARP II did come the Fed.

The Central bank creating credit (money) is a taboo, as
much as running a budget deficit was taboo in the 1930s.

Weimar and Zimbabwe broke the ONE GOLDEN RULE, and then like a teenager having their first drink cleaned out the bar.

There IS a role for the Central Bank to buy out toxic, or frozen assets: Selective re-inflation, or general re-inflation. The thing outrages people is the moral hazard: Reward for folly. I agree. There must be sanctions.

But the argument about the Central Bank creating money and hyper inflation is nonsense. A commercial bank creates money with each loan it provides. When a loans fails, the "money" resting on them vanishes too.

With the Debt Overhang in the world today, re-inflation is one way out. And loans repaid in diluted dollars, is a sanction.

BUT as Warren noted, the US dollar losing it's reserve status is another thing all together. The "quantitative" operations, read creating money, already underway throughout OECD do need to be coordinated. Otherwise it becomes something like a beggar thy neighbor exchange rate war.
I don't have answers. But I do no the RW hyperinflation BS is designed to keep the cost of continuing bailouts squarely on the shoulders of the taxpayer, rather than the monetary system as a whole.

[Zynx]

5. I am not going to worry about hyperinflation until I start seeing commodities prices

spiking by amounts greater than they were last spring and early summer. Even then, that's only a warning sign.