Inflation will have big financial impact
WHEN unscrupulous governments got into financial trouble, there has always been a simple solution.
Just print money… and why stop at small sums? Print lots of it, trillions upon trillions even!
If you can fire up those moneypresses, why not use them?
The answer to that question is that printing money simply devalues the existing supply. A concept known as inflation. Duh! That’s the reason central banks are now independent of politicians.
Economic history is littered with hyperinflationary disasters caused by politicians trying to solve financial problems by printing money.
Take Germany’s Weimar Republic in 1923, when workers brought wheelbarrows to work to collect their daily pay.
The price of bread was around €1 in 1920. By mid 1923, it shot up to around €1,000. By September it cost €1.5m, rising to around €500m a month later.
That was a bargain compared to the €2.5bn price at the start of October, which became €85bn midmonth – when, not surprisingly, the whole economic system collapsed.
The inflation rate had hit 29,500%. But even that was still only the fourth-worst rate in history.
The second worst was Zimbabwe’s 80 billion percent in 2008. Zimbabwe printed an extra 81 trillion local dollars to pay debts and public wages. The Mugabe-led government would have printed even more but it ran out of paper.
The issue of a 100 million dollar bill caused panic and the price of a loaf of bread went from $2m to $35m overnight.
But even Zimbabwe’s inflation rate of 80 billion percent was eclipsed by the worst hyperinflation episode in history – the truly awesome rate of 13,600,000,000,000,000% reached in post-war Hungary with prices doubling every 15 hours.
The Hungarian government stopped collecting taxes because the money became practically worthless in the time it took to transfer to state coffers.
The latest Irish inflation rate of 1.6% a year is a long way from that bizarre situation. And few economists believe that we’ll be toddling down to the shops to buy a loaf of bread with a wheelbarrow full of money anytime soon.
Post-war Hungary, Weimar Germany and Zimbabwe printed extra money that went directly into circulation, they point out.
Central Banks like the US
Federal Reserve and the European Central Bank are much more sensible. They cleverly squirrel the extra cash away from general circulation by putting it into government and banking bonds so it doesn’t impact prices ‘on the street’. Or that’s the theory.
Some respected figures also, however, do warn of the risk of runaway inflation. Art Cashin is an Irish-American financial legend on Wall Street, who manages over $600bn worth of assets for UBS. He knows a thing or two about the value of money.
He pointed recently to ‘eerie parallels’ between Weimar Germany and the political and economic situation today. The fledging German Republic was a fragile democracy crushed by debt from a recent war and reeling in the aftermath of a pandemic (Spanish Flu).
Today, democracy is also under attack as countries battle crushing debt accrued by fighting the 200812 financial crisis – and the worst global pandemic since Spanish Flu. Governments in both periods felt justified in issuing vast sums of new money to cope with their ‘uniquely’ challenging situations.
The inflationary upsurge from the extra trillions of dollars and euros created to fight Covid 19 is
relatively low so far. Prices are spiking in the EU and even-greater US price rises of 5% are alarming… but economists tell us these are a temporary post-Covid 19 ‘blip’.
However, Cashin points out, the full impact of Weimar Germany’s moneyprinting was not felt for years. And there should be an even greater delay in impact from today’s moneyprinting programmes because the extra trillions are ‘warehoused’ in government bonds out of general circulation.
There’s no cause for immediate alarm about hyperinflation. However, ‘ordinary’ inflation is definitely back, which will have a major impact on our finances.
And maybe we should still even keep that wheelbarrow handy – just in case.