Hyperinflation! The Libertarian Fantasy That Never Occurs … While it is probably true that no one has ever gone broke underestimating the intelligence of the public, it is also true that many who try to turn a profit from stupidity often become the victims of their own nonsense. As we have discussed previously, the fear industry that has grown up since 2008 – mainly centered on the gold market – is a manifestation of this dynamic. Their clarion call is that hyperinflation is inevitable and could happen at any moment. We will not debunk their false claims that Quantitative Easing and other monetary easing programs will lead to hyperinflation because these programs do not contribute to aggregate demand. … Even if we accept their reasoning, economies will not generally react to increases in demand as the hyperinflationists think they will. – Naked Capitalism
Dominant Social Theme: This idea that printing money debases currency is a crazy one.
Free-Market Analysis: This is certainly a well-written and incisive analysis but we find it difficult to believe in this day and age that someone can argue that printing paper money is not of itself inflationary and that it will not lead to price inflation.
The Austrian – free-market – economic movement has made great strides in educating people about the reality of money in the modern era but this article tends to discount the Austrian analysis and focus on money from a purely Keynesian standpoint, or so it appears.
The analysis of Keynes when it came to inflation, at least as it is appears in the popular press, involves an assertion 1) that inflation has to do directly with prices and 2) that prices rise and fall based mostly on wage push, supply and demand, etc.
It was the genius of free-market economics that identified money as a substance unto itself that reacted with the larger economy and influenced it in ways that were at once predictable and unusual. Here's more from the article:
Okay, so let's look at this model. Imagine an economy in which full employment exists in perpetuity. Every time someone loses their job the wage decreases because the unemployed worker accepts a wage cut to regain their employment with a competing employer. But, although the wage falls, prices also fall in response to the lower cost of labour – and hence the purchasing power of workers is maintained. In addition to this we must assume that factories are working right up to capacity. Every last bit of output that can be cranked from the machines is being squeezed out because, after all, why would an entrepreneur have machinery that they are not currently using? (Yes, for those of you who actually understand how factories and firms operate… I am indeed being facetious… and, for those unaware, we will see why in what follows).
As we can see, this is a very rigid system. It is perfectly balanced but, like a spinning plate, anything from the outside that might intrude will knock the system off balance and cause it to spiral out of control. Let us remember that this is not a representation of reality. It is the thought structure of a particular group of economic commentators. The fragility is not in the real world, but in the ideational constructs of these commentators. We should always keep this firmly in mind. This sort of thinking represents the mental structure of those who propound it, it does not reflect the real world.
Now, imagine that a government bureaucrat saunters in and dumps a pile of money into the economy. What happens? Well, assuming that the workers do not hoard it and instead go out and spend it, the results should be obvious. The workers will now try to buy more goods. But since the factories are operating at full capacity and the workforce is fully employed the result will be that prices begin to rise. If the government continues to pump newly printed money into the economy prices will continue to rise and both producers and consumers will begin to anticipate these rises. Thus they will begin to spend the newly printed money faster and faster until… you guessed it… hyperinflation!
We should pay attention here because it highlights a strange truth about your average right-wing libertarian economic commentator: namely, that they view a capitalist economy as being a remarkably fragile organism. Rather than being a robust machine that grinds over external disturbances, the right-wing libertarian views the system like a spinning plate: impressive to watch, beautiful even, but ultimately fickle and feeble. This, of course, is what reinforces their conservatism – because, the truth of the matter is that right-wing ideology, whenever it goes beyond crude self-interest, is almost always grounded in fear and insecurity.
The author of the article is a research assistant at Kingston University in London, and as stated above, this seems to be a Keynesian interpretation of economic function. He seems to suggest that price inflation takes place when an economy is functioning at or near capacity. In fact, monetary price inflation is not a function of economic activity.
Of course, one has to make the distinction between monetary inflation and price inflation. Monetary inflation involves the printing of fiat money or the debasement of coins within the context of a metals standard. Price inflation is the result of this debasement. But the debasement can actually happen throughout the business cycle. Price inflation may show up more discernibly in some parts of the business cycle than others.
Proposing that more money debases the existing supply is not exactly a revolutionary insight and actually, it is based on common sense. When there is too much of any good, prices fall. The problem with current monetary models is that they do not allow a marketplace to function. Central bankers do not know how much money to print and thus always print too much.
If there is no immediate price inflation that is because the money is trapped in bank coffers and has not yet circulated. But eventually that money WILL circulate. And at that time there will be significant price inflation. In fact, in the West there already IS but it is not being reported properly as the inflation data are provided by those involved with central banking who have a professional incentive to understate it.
It will probably be pointed out that since World War II there have been periods of sustained inflation in capitalist economies that were below full employment levels. This is true, but it was an entirely different type of inflation that was mainly due to rising oil costs which was in turn due to political turmoil in the Middle East. For some reason it is ingrained in the common/libertarian mind that all inflations are a case of too much money chasing too few goods. In fact, these inflations are very rare in modern economies and inflations are far more likely to be due to rising commodity prices. Weimar and Zimbabwe will be brought up too. These hyperinflations were due to entirely different reasons …
Finally, I would implore those that buy into these crude arguments: stop thinking with your stomachs. Yes, the hyperinflationist argument is appealing in many ways. Daily life under advanced capitalism is rather dull and many imagine that after a hyperinflation society will turn into a sort of Wild West where things get a bit more interesting; especially given their stocks of guns and gold. This is just a fantasy and if you truly are into the whole "Road Warrior" thing and find it appealing at some level then man up and move to Somalia or join the army.
We see here, again, that inflation is attributed to economic factors. This is the crux of the Keynesian/Austrian argument. But the Austrian argument is monetary and has little or nothing to do with the industrial economy itself. The author writes that the Austrian model involves the hypothesis that "all inflations are a case of too much money chasing too few goods." This is not the case, to the best of our understanding.
The Austrian model focuses on money … not goods. Money is seen as a product. If there is too much of it, then its value will decline. If there is too little, its value will rise. The amount of goods that the money is chasing has nothing to do with inflation itself and little to do even with price inflation. A good or service can be quite available and if too much money has been printed the "price" for that good or service will rise.
By (purposefully?) not making a distinction between inflation and price inflation, Keynes's legacy when it comes to this debate is confusing at the very least. Inflation occurs when the money supply expands beyond what the economy can absorb. Price inflation is the result.
It is a monetary issue, not an industrial one.