‘We wait until Pandora’s Box is opened before we say “Wow, maybe we should understand what’s in that box.” This is the story of humans on every problem.’ Quote by Peter Singer.
Inflation is out of the box and the real danger is that in can’t be controlled and will take on a life of its own and can even spiral into the hideous prospect of hyperinflation. Inflation is everywhere at the moment, but what turns inflation into hyperinflation?
Well, having a look at historical hyperinflation blunders, the most famous has to be Germany before World War 2, when people started to burn the Deutschmark as the paper was worth more as fire paper.
There are a few requirements for a hyperinflation situation. Firstly an uncommon destabilising event, such as a war, natural disaster or a policy that leads to a sharp decline in productivity. In the example of Germany it was the striking of the workers on the Ruhr that led to 30% unemployment and a considerable fall in productivity.
Then this event has to be dealt with by central bankers and governments giving a huge monetary stimulus, printing money and increasing money supply. In Germany, the striking / unemployed workers were financially supported by the German government who paid for their wages by printing cash. Germany was effectively devaluing its currency and devaluing the debts that it owed through high inflation. This high inflation spiralled completely out of control.
They say that history never repeats itself but ‘echoes’ instead. The world has experienced a similar productivity limiting event in Coronavirus. Workers have been furloughed (rather than striking) but still received payment. The furlough payment has not been linked to work or any productivity. It has not been funded by higher taxes but increased debt or ‘printing money’.
Inflation is on the rise and everyone is talking about it, whether it’s heating bills, the price of food, and basic essentials of living. The US is recording 7% inflation rates and interest rates are still at rock bottom levels.
What needs to happen is for the genie to be put back in the bottle quickly and for this to happen interest rates need to rise sharply. Now, this is the most unpopular and unsavoury action for central bankers to make. All householders are struggling with higher costs of inflation and to burden them with higher interest rate costs seems cruel and there is a reluctance to deal with the inflationary situation. This makes conditions ripe for hyperinflation.
Turkey is so interesting right now because they are experiencing the full effect of the Pandora’s box. Inflation hit 36% in December. The President Erdogan has gone in the opposite direction to economic wisdom and instead of raising interest rates has cut them. Erdogan has described interest rates as ‘the mother and father of all evil’. He clearly doesn’t want to administer the unpopular medicine to the patient !
This is fuel on the fire. He believes a cut interest rates will devalue the currency and drive exports and growth. Inflation is now forecast to rise to 50% by March, but with these policies it is hard to see the Turkish people having any remaining faith in the currency. Turkey looks to be on the brink of hyperinflation as people flee the Turkish Lira.
If central bankers do not raise rates and bring inflation under control, then can we expect worthless currencies?
Rebel Economics 