Sunday, June 21, 2009
Hyperinflation is about unattractive money
No printing press required
Typically price rises in a hyperinflation massively outstrip the rate at which money has been recently issued, so it's not just about the rate of printing. There must be more to it.
The dollar became the world's reserve currency by having the longest reliable history of increasing purchasing power. That quality is intricately tied up with US economic expansion, because people who chose to save a dollar instead of spend it had a good chance of their money finding its way to a productive project, and later returning them more purchasing power than they originally saved.
But being a favoured international reserve currency is a double-edged sword. While the world chooses to accumulate your money everything is doubly easy. You put dollars into circulation and foreigners willingly accumulate them, allowing your citizens to enjoy the exports of the world at rock-bottom prices. What a life!
Unfortunately when you lose that special status everything changes. The flip side of being the world's reserve is that everyone is soon sitting on a great pile of your money, and you become exposed to the possibility that they dump it back into circulation.
The Dollar charge
High school science provides a useful analogy. A dollar is a bit like a positively charged atom existing in a world of negatively charged people. Like static electricity the dollars are attractive to the people.
At different times, depending upon the actions of central bankers, the attractiveness of dollars varies. If dollars store and gain monetary value over time, then like a strong positive charge they stick like glue in the pockets of their negatively charged owners.
This sticky money does not get spent as quickly as central bankers would like. Instead it is cautiously hoarded and economic activity stalls, eventually causing a cycle of falling prices - deflation - because it profits people to put off their spending. But money created by central banks can be injected into the economy to create a nervousness in savers; a hint that it should be spent or risk losing value. It makes the existing supply stick less in peoples’ pockets and keeps it circulating in economic activity.
Governments have discovered this economic trick. It is quite easy to do and appears to be so safe for such a long time that they have grown to rely on it as a trusted, indeed almost the only mechanism necessary for economic management. But it leads to aggressive inflation, and the reason for introducing the electric charge analogy is it can show us how.
Posted by Sax-Gold Ent at 21:17