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Idaho's Weekly Journal of Local & National Commentary  Week 3814

 

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by Free Market Duck

  Zimbabwe inflation hits 1,000,000% per year…
Government central bank issues new $50 Billion denomination notes as paper currency becomes worthless
(July 3, 2008)

 A Coke in Zimbabwe will cost you $15 billion Zimbabwe dollars.  Vending machines are non-existent since one Coke would require billions of coins.

 A loaf of bread costs $30 billion Zimbabwe dollars.

 A $10 million Zimbabwe dollar bill is worth 0.0008 U.S. cents.

 A $500,000 Zimbabwe dollar bill is already out of circulation and is worth 0.00004 U.S. cents.

 Zimbabwe citizens are allowed to withdraw only $25 billion Zimbabwe dollars per day, less than enough to buy a loaf of bread.

 After imposing price controls last year, supplies of goods dried up, so the Zimbabwe government was forced to end price controls.

 Under pressure from the German government, the Munich company, Giesecke & Devrient, that supplies Zimbabwe with tons of airlifted blank paper so it can print its multi-billion dollar hyper-inflated notes, has stopped sending its special paper to Zimbabwe.  That’s OK, says Mr. Gono, Zimbabwe’s Treasurer, we “got a Plan B.”

Harare, Zimbabwe – Ya-yesss, girl friends, the Treasurer of Zimbabwe’s 1,000,000% per year hyper-inflated central bank note, Mr. Gideon Gono, has “a Plan B” to solve its loss of blank bank note paper cut off from German paper company Giesecke & Devrient.  Zimbabwe will now issue Invisible Money printed on Invisible Paper purchased from an Invisible Paper Mill which manufactures Invisible Pulp from an Invisible Forest in Zimbabwe.  Well shut my mouth and pour me another hot cup of Rocket Java, girl friends.  The Wizard of Oz is President Robert Mugabe, alive and kicking as the Dictator of Zimbabwe.  We always wondered where he up and ran off to.  Yahoo.

   As it turns out, G & D paper manufacturers based in Munich, Germany are the same secret family that provided tons and tons of worthless cash printed up by Germany’s Weimar Republic in the 1920s during Germany’s Great Inflation.  That inflation lasted about 9 years, wiped out the entire middle class, and finally ended only after Germany couldn’t keep up with the printing of Trillion Dollar Reich Mark notes.  German housewives ran down to collect their husband’s trillion Mark paychecks on a daily, then hourly, basis, with wheel barrows full of paper money which they then rushed to market to quickly exchange for coffee, sugar, and any commodities available in order to beat the daily devaluation of the German Reich Mark.  At one point, a loaf of bread cost $23 billion Marks.  Citizens burned logs of rolled paper Marks for heating fuel because they were cheaper than real wood.

   As economist Dr. Henry Hazlitt writes about the Great German Inflation:

 In 1914, Germany’s Fed Reserve, the Reichsbank, suspended conversion of its paper money into gold.  By November 1923, after continual “injections of liquidity,” Reich Marks in circulation soared past 92.8 quintillion Marks and skyrocketed past 496 quintillion Marks through July of 1924.  On Oct 25, 1923, the Reichsbank apologized that it had been able to only print 120 quadrillion Marks that day, but the demand was for one quintillion Marks.  Finally, after nobody would accept the Mark, the Reichsbank devalued to a new Rentenmark convertible at 1 trillion to one.  By Nov 1923, circulation had increased 245 billion times and prices 1,380 billion times.  Inflation finally stopped in one day when 4.2 Rentenmarks (4.2 trillion old Marks) exchanged for 1 Dollar, which was convertible into gold.  Germany, via the Dollar, finally went back to the gold standard, after destroying its entire economy in 9 years through hyperinflation of its non-backed paper money. – Dr. H. Hazlitt, Economist

   So what is it that Americans can learn from these two recent examples of hyper-inflation of paper money by a government central bank?  Are today’s economic problems in the U.S., i.e. a crashing housing bubble, impending stock market crash, a general rise in the prices of ALL commodities and services, AND the printing up of trillions and trillions of non-backed non-redeemable U.S. Dollars by our central bank, the Federal Reserve, telling us that we are heading down the same hyper-inflation paths as the governments of Zimbabwe and Germany’s Weimar Republic?  Are the Austrian Free Market Economists correct in asserting that the current Effect of America’s economic stagflation and Recession is directly due to the Cause of central bank mismanagement – i.e., hyper-inflation -- of our U.S. Dollar?

   It is worthwhile to note the current similar path of the U.S. monetary system, similar to the Weimar Republic and Zimbabwe:

 Today in the U.S. in 2008, after FDR dumped the gold standard in 1933 and Nixon cut all dollar ties to gold in 1971, our derivative markets currently exceed a half a quadrillion dollars – $500,000,000,000,000 – of non-collateralized paper fueled by America’s central bank, the Federal Reserve.  And what is it that everybody is screaming for more of?  The injection of billions and billions of more non-collateralized paper money as “liquidity” or fake “capital” to “spur” the “growth” of the economy.

   Many Wall Street Journal editors, Federal Reserve Chief Ben Bernanke, and U.S. Treasury Secretary Hank Paulson err when they state that the Federal Reserve and/or member banks are issuing “capital” to bolster the U.S. economy.  Banks do not print “capital” unless they are issuing redeemable certificates such as gold or silver certificates.  Today, banks only print non-redeemable non-backed paper currency or debt money out of thin air.  “Capital” is the monetary equivalent of redeemable, tangible “capital goods” backing commercial paper, such as gold or silver certificates, or contracts, titles, and legal receipts or invoices for stored “capital goods” such as buildings, companies, real estate, precious metals, etc.  No currently issued American paper money is backed by, or redeemable in, gold, silver, or any other “capital goods” and, thus, neither the Federal Reserve Note (the U.S. Dollar) or Treasury Notes qualify as true “capital.”  What the Federal Reserve and its member banks are really doing is simply printing worthless debt coupons, fiat currency, non-backed, non-redeemable paper currency out of thin air.  (Banks that are currently raising “capital” ha-ha by creating more fake “paper” stock to presumably bail themselves out of subprime and other bad SIV loans are actually diluting their stockholders’ shares and thus are robbing their stockholders by inflating, or debasing, the value of their paper, their stocks.  No different than the Fed Reserve printing up fake money out of thin air.)  

   Note that what the U.S.’s Federal central bank is doing is philosophically, theoretically, and empirically no different than what the central bank of Zimbabwe, Germany’s 1920s Weimar Republic, today’s European Central Bank (ECB), and all the central banks of China, Russia, Canada, France, Italy, Japan, Britain, Mexico, and every nation on the globe is busy doing.  It’s called currency inflation, which is the Cause; and the Effect is always price inflation with eventual serious economic misallocations, unintended consequences, stagflation, Recession, and – given an interventionist government – an extended Depression with a concomitant loss of individual rights and freedoms to “save” everybody from the “mysterious” ills of the economy.  Like it just flew in from Mars last week or something.

   Issuing more paper money by the government’s central bank is not the solution to our economic ills but that is exactly what central banks always do for various orchestrated reasons:  (1) to pretend to the people that they know what they are doing and are helping citizens out by giving them more and more paper money, (2) paying off national debts incurred by the central banks and the politicians by printing up more and more debased, worthless paper money, and (3) creating bogus national security reasons to suspend individual rights such as habeas corpus, freedom of trade, travel, speech, and association while politicians consolidate more and more political power under the guise of “saving” the population, who, by the way, the politicians in conjunction with the central bankers – since that’s the name of the game -- will whip into nationalistic economic frenzies that allow the Executive, Legislative, and Judicial branches of government to perform activities previously illegal under the U.S. Constitution and Bill of Rights.

   When it gets down to (a) $10 for a gallon of gas or (b) bomb your neighbors, U.S. consumers will eagerly grant their government the power to nuke Iran or anybody else to “save” them from a Great Depression.  Just wait, you will see how all stripes of Americans will eagerly turn into National Socialists who will do virtually anything to “save” themselves, including blaming everybody except themselves for allowing the U.S. Federal Reserve, the U.S. Treasury, politicians on both sides of the aisle AND the President of the U.S. – whether it’s Democratic socialist Barack Obama or GOP socialist John McCain – to drag us into World War III after a Keynesian Economic Mess created by the concepts embodied in the premise of ridiculous “targeted inflation.”  That is, in fact, why monetary inflation and price inflation will not stop:  today’s basic economic assumptions and premises of Quantitative Econometrics are absolutely wrong but nobody, practically nobody, will admit it.  And so, like the mistaken physicians of the 1700s, we continue to bleed ourselves to death in the mistaken belief that bloodletting is the cure for what ails us.  But monetary inflation is not the cure for price inflation.  It is the cause.  (Note:  By the way, “speculators” do not cause price inflation.  They merely interpret supply and demand but are not infallible or we’d all get rich quick.  They are necessary in a free market to try and direct “capital” according to their interpretation of supply and demand.  The consumer, through subjective future anticipation, creates prices, not the producer – except in “natural” or government-created special monopolies such as OPEC, but that will last only temporarily as monopolies always invite competition from within and without.  Speculators, as all futures traders know, can just as easily lose their shirts as make profits.  Otherwise, we could all get filthy rich by simply playing the futures market.  Think it’s easy?  Go ahead and try, sucker.  Do it on margin, too.  Just for fun since you think it’s so easy.  Good luck.)

   Back to the scene of the crime. 

   So, pay attention, Americans.  What happened in Germany’s Great Inflation and in Zimbabwe today is very instructional from both a philosophical and empirical point of view because it is exactly what is happening at a quantitatively lesser, but increasingly greater, level in America today.  It is not a matter of “if” but “when” we will approach the economic absurdity of today’s 1,000,000% inflation in Zimbabwe.  Think about it.  You have already accepted with a straight face the economic premise that President Bush can actually “stimulate” the U.S. economy by passing out $168 billion in $600 cash increments to every man, woman, and child in America.  What an absurdity.  And yet, virtually nobody questions the obvious fact that the President is stupidly standing there naked as a Jay Bird, passing out “free” Monopoly Money that has no basis for value.  What’s next: Wooden Nickels?  Plastic see-through coins?  Invisible Paper money from Invisible Forests?  Get real, people, or you’ll soon find out it’s not nice to try and fool Mother Nature, or Father Cause and Effect. – FM Duck

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