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The Reason For Hyperinflation-phobia

Submitted by Doug French via Mises Canada blog,

The New York Times can be forgiven for blaming the empty shelves in Caracas to the plunge in oil. However,  a raging hyperinflation cleared the cupboards before the price of oil was cut in half.  William Neuman’s front page story illustrates what the NYT does best, making economic tragedies personal.

Laboratory assistant Mary Noriega must stand in line for hours with 1,500 others just to buy food, “as soldiers with side arms checked identification cards to make sure no one tried to buy basic items more than once or twice a week.” Ms. Noriega has had to barter with neighbors to put food on the table.

In Thomas Mann’s epic short story describing life in Weimar, Germany, “Disorder and Early Sorrow,” the woman of the house, Frau Cornelius, similarly tries to keep food on the table,

The floor is always swaying under her feet, and everything seems upside down. She speaks of what is uppermost in her mind: the eggs, they simply must be bought today. Six thousand marks a piece they are, and just so many are to be had on this one day of the week at one single shop fifteen minutes’ journey away.

Paul Cantor, in his analysis of Mann’s story, “Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics” points out “how one government intervention in the economy immediately leads to others. Having produced scarcities in the market with their inflationary policies, the authorities introduce new regulations to try to deal with the irrationality they themselves created.”

It’s not hard to understand what The Economist called “Germany’s hyperinflation-phobia.” The premier economics magazine in the world wonders “the extent to which these lessons remain appropriate. Deflation is now a greater risk than inflation in Europe.”

However, memories run deep when the exchange from marks to dollars goes from 4.2 to one in 1914 to 4.2 trillion marks to the dollar by November 1923.  In Mann’s story with this monetary debauchery taking place in the background, people learn how to work around it.

For no single household is allowed more than five eggs a week; therefore the young people will enter the shop singly, one after another, under assumed names, and thus wring twenty eggs from the shopkeeper for the Cornelius family.

In an eerie case of life imitating art that imitated life, as the Venezuelan people buy laundry detergent, vegetable oil and corn flour, (all subject to government price restriction),

Every purchase was entered into a database, ensuring that shoppers did not try to buy the same regulated staples at the chain for at least seven days.

 

Soldiers patrolled the line outside, police officers were stationed inside and government officials checked identification cards, looking for fake ones that could be used to cheat the rationing system — or for immigrants with expired visas. An official from the immigration and identification service said that offenders would be arrested.

In Caracas the government won’t be so easily fooled. As the Times reports shortages and long lines are a way of life in Venezuela, but with the plunge in oil,

the government has sent troops to patrol huge lines snaking for blocks. Some states have barred people from waiting outside stores overnight, and government officials are posted near entrances, ready to arrest shoppers who cheat the rationing system.

Healthcare has taken a considerable hit with supplies running out. Operating rooms have been shut down for months despite hundreds of patients on the waiting list for procedures. At one private clinic a surgeon was able to keep the operating room open by smuggling in essential drugs from the U.S.

Thomas Mann shows how quickly money loses value in the Weimar Republic.

Before the young people arrive [Frau Cornelius] has to take her shopping basket and dash into town on her bicycle, to turn into provisions a sum of money she has in hand, which she dares not keep lest it lose all value.

The NYT has a photographer in Caracas, and this photo speaks a thousand words.

“Things are going to be even worse because oil keeps Venezuela going,” Luis Castro, 42, a nurse told the Times while standing in line with hundreds of others at a grocery store. He had arrived with his wife and 6-year-old son at 6 a.m., but by 11:30 a.m., they had still not entered. “We’re getting used to standing on line,” he said, “and when you get used to something, they give you only crumbs.”

Cantor writes that while most people are ruined in a hyperinflation some make fortunes.  In its slideshow the Times featured a picture of a speculator with a fist-full of money in Caracas selling black market soap, butter and cooking oil on sale.

In his book The Downfall of Money:Germany’s Hyperinflation and the Destruction of the Middle Class Frederick Taylor writes “people with average incomes, and no access to agricultural produce or foreign exchange, were forced to hunt and queue for food–both because their incomes more often than not did not stretch to buying what they wanted on a particular day but also because there was, as the hyperinflation tightened its grip, a genuine shortage of food.”

Farmers didn’t want to part with their produce in exchange for worthless paper.  ‘In what was rapidly becoming a barter economy, the agile and the cunning, not to mention dishonest, citizen was top of the Darwinian heap,” writes Taylor. Doctors “in rural areas demanded payment in food from farmers who came to them for treatment.”

Workers began to be paid everyday and the men would hurry off with their wives to buy whatever they could. They would then hurry to a bank to buy whatever ‘hard’ currency could be had. The number of banks mushroomed to handle the business. Deutsche Bank had 15 branches in 1923 and ten years later it had 242. The number of bank staff quadrupled. In 1921 67 new banks were founded, 92 more were created in 1922, and 401 opened in 1923-4.

Economic activity didn’t create the need for new banks, “the banks were overloaded with orders for buying and selling shares and foreign exchange proceeding from the public which, in increasing numbers, took part in speculations on the Bourse.”

“The collapse of money and the collapse of morals became identical,” writes Taylor. Flesh was for sale as is depicted in “Cabaret” and not just with traditional prostitutes but “the newly dispossessed daughters (and sons) of the educated middle class, who had now also taken to the sex trade, were endlessly available at a price–preferably in cigarettes, precious metals or hard currency rather than paper marks.”

With the inflation wiping out the savings of the middle class, it meant young women had no dowries to offer. “When the money became worthless,” wrote one woman, “it destroyed the whole system for getting married, and so it destroyed the whole idea of remaining chaste until marriage.”

The author cites a story from Russian writer Ilya Ehrenburg about a night out with friends from Berlin’s foreign colony. he writes that they ended up at a “thoroughly respectable bourgeois apartment.”  They were offered lemonade with a little alcohol in it and

Then the two daughters of the house entered, in an unclothed state, and began to dance. The mother looked hopefully at the foreign guests: Perhaps her daughters would please them and would pay well, in dollars, of course. “And this is what we call life,” the mother sighed. “Actually it’s purely and simply the end of the world.”  

Nobel Prize winner Paul Krugman, always annoyed with hyperinflationphobes wrote, “No, the 1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation and depression. Hard money and a gold standard obsession, not excessive money printing, was the proximate disaster.”

Oh really? In 1923 Hitler said, “Believe me, our misery will increase. The scoundrel will get by. But the decent, solid businessman who doesn’t speculate will be utterly crushed; first the little fellow on the bottom, but in the end the big fellow on top too.  But the scoundrel and the swindler will remain, top and bottom. The reason: because the state itself has become the biggest swindler and crook. A robbers’ state!”

Hitler wasn’t talking about hard money, he was talking about excessive money printing by a robber state.  Krugman himself echos those words in another column,

Hyperinflation is actually a quite well understood phenomenon, and its causes aren’t especially controversial among economists. It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press, trying to extract large amounts of seignorage — revenue from money creation. This leads to inflation, which leads people to hold down their cash holdings, which means that the printing presses have to run faster to buy the same amount of resources, and so on.   

Out of control government that can’t borrow or tax enough to pay its bills?  Zimbabwe, Iran, Venezuela…what country is next?