|Olive: Hyperinflation fears on the rise globally|
Mar 28, 2010 David Olive thestar.com
It's a question worth asking: Is the remarkable flood of Western government funds into an anemic global economy – of a magnitude never seen in modern times – enough to tip us into a period of hyperinflation when the day of reckoning arrives to confront our recent accumulation of massive national debts?
Every major economy, Canada included, has resorted to deficit financing to jump-start recession-battered economies. The U.S. just closed the books on a 2009-10 fiscal year with a record $1.4 trillion (U.S.) deficit, and projects a further deficit of $1.5 trillion next year. This gets tacked onto a national debt that had already more than doubled during the Bush Administration.
One can argue whether certain causes of the staggering deficits could have been avoided. Was it good public policy to bail out the Wall Street and London banks and Detroit and Europe's automakers, and to rescue Main Street with a record $787 billion economic stimulus package in the U.S. and deploy similar stimulus efforts in Ottawa, Beijing and Berlin?
One can't argue, however, with the fear this run of outsized state spending has inspired among global investors.
They worry that Western governments might not be able to someday erase those mounting deficits, which have caused U.S. federal debt to approach 100 per cent of GDP – its highest level since the years immediately following the end of World War II.
The jitters account for the weakened U.S. dollar and a slumping euro. It is hardly a surprise that Greece, fiscally mismanaged for a decade, would someday face default. What is alarming is that Athens' belated acknowledgement of its fiscal crisis immediately triggered fears that a raft of other economies – including Spain, Portugal, Ireland and perhaps even Britain – would follow suit. How else to explain the 307 per cent jump in gold prices since 2000 to a current $1,140 per ounce, for a commodity used principally as a hedge against global ruin?
The doomsday scenario of hyperinflation is fed by hundreds of websites like FutureOfDollar.com, a relentless bear on the greenback, which summarizes the case for gold bugs and others fleeing from leading world currencies.
Assessing the U.S. scene, Andrey Alexandrov of FutureOfDollar writes: "Government financial obligations including (servicing the) national debt, Social Security, Medicare and other benefits and mandatory programs continue to pile up, moving the U.S. to first place in the world for the highest debt-to-GDP ratio. The budget deficit is growing with no visible turning point. These factors indicate increased likelihood of hyperinflation in the near future."
Of course, there is no shortage of worst-case scenarios in times like these, just as euphoria must run its course in times of panic buying. (Remember Dow 36,000, published at the height of the dot-com boom?)
It's another matter, though, when Michael Kinsley, a decades-long U.S. political observer, and from a slightly left-of-centre perspective, recently describes "My inflation nightmare" in The Atlantic. Progressives like Kinsley usually can be relied upon to embrace Keynesian deficit spending in times of economic crisis.
Kinsley sees the latest, epic recession as an inevitable consequence of world economies – and conspicuously the U.S. – living for decades on credit. "We partied on borrowed money," and now the Great Reckoning has arrived. Without questioning the wisdom of the Obama emergency measures – which have their counterparts in every industrial nation over the past two years – Kinsley insists that "this cure has been one ice-cream sundae after another. It can't be that easy, can it? The puritan in me says that there has to be some pain. That's not to say that there hasn't been plenty of economic pain. But that pain has come from the recession itself, not the cure."
But is tomorrow's debt unmanageable? Or is it akin to America's post-World War II debt, which reached more than 120 per cent of GDP. Yet a post-war boom had cut that ratio in half by 1955. A relatively modest inflation rate of 4.5 per cent during that period alone accounted for about 40 per cent of the reduction.
More recently, with a combination of modest spending cuts and tax increases on the wealthiest Americans, Bill Clinton transformed an inherited record deficit in 1993 into three consecutive years of budgetary surplus by the end of his second term in office.
North America has, of course, never experienced hyperinflation. In modern times, inflation peaked at about 13.3 per cent in the early 1980s. The true hyperinflation of a 1920s Weimar Germany or today's Zimbabwe (hard to measure, but believed to have hit 90 sextillion per cent) is a consequence of a total breakdown of a nation's political institutions. Politically, argues Ryan Avent in The Economist, runaway inflation simply isn't a politically viable option.
"The pain of hyperinflation is every bit as bad or worse than the pain of tax increases, or spending cuts, or default," Avent writes. "No politician would risk it and even if the politicians were willing to (inflate their nations out of debt), America's independent (Federal Reserve Board, or central bank) wouldn't let them."
In North America, a troublesome level of inflation is not even faintly evident on the horizon. Too much plant capacity remains idle. High jobless rates in North America and Europe have robbed workers of bargaining power, constraining 1970s-era wage-cost inflation. Continued weakness in housing markets and fear of job loss are holding back consumer spending and thus price inflation.
Kinsley aside, most of the hyperinflation talk has come from self-interested parties – gold bugs counting on a geopolitical apocalypse, for instance, to justify their investment in the yellow metal. It has been even more pronounced among right-wing opponents of supposedly unaffordable U.S. health- care reforms and belated Wall Street reforms – a rallying cry among the forces of reaction.
Kinsley is on to something, but it's not economics. It's human behaviour.
He misses the ethic of delayed gratification, which two generations of post-Depression North Americans understandably swore by. Cheap access to easy money has corroded our sense about the real value of things.
As Kinsley acknowledges, he can't find an economist he admires who shares his worry about hyperinflation. But the "partying on borrowed money," that's a message this estimable commentator would be wise to dwell on. After all, no one put a gun to the heads of all those buyers of $54,000 SUVs, or the folks who used subprime mortgages to buy more house than they could afford.
Can we emerge from the wreckage of the worst economic downturn in the lives of most people drawing breath today without a rethink of our "shop till you drop" consumerism ethic?
It can't be that easy, can it?
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