The root cause of hyperinflation is excessive money supply growth, usually caused by governments instructing their central banks to help finance expenditures through rapid money creation. Hyperinflations have mostly occurred in a context of political instability, adverse economic shocks and chronically high fiscal deficits.
– Joachim Fels and Spyros Andreopoulos, Morgan Stanley Global Economic Forum
Poor Gideon Gono. He gave it the old college try, but that just wasn’t good enough.
Gideon Gono, in case you aren’t familiar with the name, is (or at least was) the head of Zimbabwe’s central bank. In local circles he is known by his nickname, “Mr. Inflation.”
The “Mr. Inflation” moniker is due to certain eyebrow-raising measures Mr. Gono has taken, like issuing bank notes worth Z$100 trillion (How many zeroes in a hundred trillion? Fourteen?) in a futile attempt to ease the country’s chronic cash shortages.
When 14 zeroes don’t do the trick, you know it’s time to give in – and that’s what the country has done.
“Zimbabwe abandons its currency,” the BBC reported on Thursday. “Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country's runaway inflation.”
Failure is never fun, but don’t feel too sorry for Mr. Gono. Being a connected member of Zanu-PF (the ultra-corrupt political party that has driven Zimbabwe into the ground), he has a 47-bedroom mansion to console him. No doubt he also has a well-padded slush fund... held in something other than Zimbabwe dollars.
Not-So-Crazy Talk
In an interview with Newsweek a few weeks back, Mr. Gono explained his actions to the outside world. What was frightening about the interview was not the degree of crazy talk – of which there was some – but the more sober aspects of the exchange.
Consider this excerpt:
Newsweek: Your critics blame your monetary policies for Zimbabwe's economic problems.
Gono: I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.
Hmm. Some of that language rings familiar. Where else have we heard about central bankers doing “extraordinary things that aren’t in the textbooks”?
Isn’t that, in fact, both the main line of defense and the main source of hope behind the West’s now-unfolding mass Keynesian experiment... the idea that the degree of money-printing, asset-buying and stimulus-funding we now witness with slack-jawed awe is “extraordinary,” such non-textbook measures having never before been tried?
Maybe what Mr. Gono (a.k.a. Mr. Inflation) is telling us is that such measures have been tried... and they didn’t work out very well...
Uncomfortable Parallels
The United States is not Zimbabwe, of course. Uncle Sam’s regime is a heck of a lot more stable. And Gideon Gono never had the privilege of printing the world’s reserve currency.
All the same, one has to wonder. Are the basic conditions that stoke the flames of hyperinflation – political instability, adverse economic shocks and chronically high fiscal deficits – really so far from the West’s doorstep?
In an interview with Barron’s last month, money manager Rob Arnott made a modest case:
How can we get out of this current mess without renewed inflation? A lot of folks are deeply concerned about the risk of deflation. The temptation is to look at history, especially the Great Depression, which was a deflationary depression and which started with a very, very low national indebtedness. If you have very little debt and you have a depression, it is likely to be deflationary. The contrast with Germany in the 1920s is noteworthy; they had massive indebtedness and hyperinflation. I’m not suggesting a risk of hyperinflation. But I am suggesting that people are too glib about tossing aside the risk of inflation, which was front and center less than six months ago for most investors.
That Hideous Strength
As your humble editor has said before in these pages: When it comes to rapid money creation, the U.S. Federal Reserve reigns supreme. In terms of sheer scale and scope, nobody but nobody prints like the U.S. of A.
Here and now, though, there are at least two reasons traders are complacent about the dollar’s fate. One, because the greenback remains visibly strong; and two, because Fed Chairman Bernanke is still wrestling with a deflationary grizzly bear.
There’s no arguing with the chart. Given the current climate, traders prefer greenbacks.
This is, in large part, because Europe looks to be at risk of cracking up. Riots on the continent threaten to make France look like Greece (where things got so bad the police ran out of tear gas), and Britain is staring down the prospect of bank losses larger than the country’s entire GDP. (Some wags have begun newly referring to London as Reykjavik-on-Thames – though it seems a touch early for Iceland comparisons.)
Add in Moody’s threat to downgrade Ireland’s credit rating, Spain in the grips of a vicious housing bubble unwind, and more troubles building up in Italy and the Eastern bloc, and what you get is a euro on the outs.
Then further season the stew with ongoing global economic fears, a lack of certainty as to when growth will resume, and an increasing likelihood that Japan will devalue a too-strong Yen, and you wind up with a situation where the U.S. dollar is the only freely traded major currency alternative left standing. (Besides gold, that is.)
Cracks in the Dam
But you’ve got to wonder (or at least I do)... is it really a good thing, in the long run, for the Fed and Treasury to be given even more rope to hang themselves?
Think about how we got into this mess – this global mess – in the first place. At root, U.S. consumers were given too much credit and Wall Street was given too much trust. In both cases, the appearance of stability led to a dramatic build-up of pressures beneath the surface.
The U.S. consumer has never pulled back, we were reminded, and U.S. house prices have never gone down. These were key rationales for letting the bubble get bigger and bigger before its 2007-2008 burst.
Now, with the greenback looking good in a relative paper sense, it’s easy to see the Fed and Treasury employing a similar line of logic. “Why not print more,” Bernanke and new man Geithner can say, “when the print-fest thus far has had no ill effects?”
Furthermore, there is a similar “hidden pressure” problem embedded in the Fed’s deflation-fighting efforts.
Imagine, if you will, the present gloom-and-doom outlook as a sort of deflationary dam holding back the waters of credit – waters desperately needed to refresh the economy. (The refusal of the banks to dole out their cash, in fact, is very much like a giant lending dam.)
In order to get liquidity to the people, the Fed (with the help of the White House) will have to “break through” this deflationary dam via sheer, unadulterated force. (At heart, that is really what these “unprecedented” Keynesian measures are all about.)
But what happens when the deflationary dam has well and truly smashed, giving way to inflationary flood? After you’ve ginned up a boiling river, how do you turn off the taps?
On that score, I doubt Ben Bernanke has any more of a clue than Gideon Gono.
That’s why I suspect the “extraordinary measures” being taken by the Fed now could prove even more extraordinary in their aftermath... and why I prefer the long-term prospects of countries with assets on hand rather than debts.
Warm Regards,
Justice Litle,
Editorial Director
Taipan Publishing Group
www.taipanpublishinggroup.com
