Monetary Cranks Call for Hyperinflation

Ellen Brown, a leading proponent of hyperinflation, mentions several other hyperinflationist economists in this article.

They are all monetary cranks, monetary idiots, monetary morons, and monumentally underinformed and ignorant in their understanding of monetary mechanics and history.

Not only are their recommendations the stuff of hyperinflation, their reasons for making these amazingly stupid and destructive recommendations are also false. For example, Brown writes “The problem today, however, is not inflation but deflation of the money supply.” This is factually false. M2 money in the U.S. has risen steadily from $8664.1 billions (9-13-2010) to $12187 billions (9-07-2015). That’s a continuously compounded annual rate of growth of 6.8 percent. Furthermore, Brown and the other hyperinflationists not only have the diagnosis wrong, but they think that the poison that they are recommending will cure their mis-diagnosed patient. They think that if the government prints money directly via the Treasury or by otherwise pressuring the Central Bank, that spending it on a variety of government boondoggles will improve the economic health of the country.

But the worst of their school of thought is their ignoring of hyperinflations of the past and the critical elements that brought them about, the most critical one being when the government directly finances its expenditures by issuing irredeemable paper notes (“money”). By directly I mean that either the government itself does the issuing or else forces or motivates a captured central bank to do so. The institutions vary in detail as do the legal steps taken, but the result is the same. The government’s constraint on printing and spending disappears. The government, as in Zimbabwe, prints and prints and spends and spends, and the result is hyperinflation.

Every hyperinflation follows this basic pattern. How can Brown and her fellow hyperinflationists ignore this? They can and they do. The human capacity for delusion and self-delusion is powerful.

From late 1945 through the middle of 1946, Hungary experienced the most gigantic inflation of modern history.” Why? “…While it is true that the government sought the means to raise revenue, rapid inflation was primarily seen as a way to reinvigorate Hungary’s devastated economy…” This is the same reason being given by today’s hyperinflationists, even though it doesn’t apply today and, in any event, doesn’t reinvigorate anything and doesn’t produce a sound economy.

Hyperinflationists are apparently all numbskulls who can’t or don’t read. Maybe they read and can’t or don’t understand what they read. Maybe they’re just fools, but educated fools who can write long papers and articles. Consider a recent case: Venezuela. On August 21, 2007, I pointed out that Chavez “… wanted to end autonomy for the central bank and bring its international reserves under presidential control.” Also: “Chávez said: ‘The international reserves of the republic will be handled by the central bank, under the direction of the president who is the administrator of the public finances.’ This had clear inflationary implications.

On Feb. 7, 2009, after Chavez had acted, I again wrote about this: “Central banks are a menace to all of us forced to live under them. An even worse menace is when the central bank is absorbed into the government. The efforts of Chavez to nationalize the Venezuelan central bank is a case in point. Acting on a four-year old law, Chavez is transferring $12 billion of bank reserves to the government for spending. This will devalue the currency by about 30 percent. It is like Roosevelt’s raising the price of gold.”

Also: “Central banks have a degree of independence from the government in most countries. Independence is a good thing. The U.S. government, following the lead of Bush and now Obama, is considering adding powers to the Fed. Volcker weakly warned against this. He did not pinpoint its main organizational defect. It is not simply a matter of diverting the FED’s attention from monetary policy or overloading it. The main issue is that it is a step toward bringing the central bank more under the direct control of the government.”

This is what Ellen Brown and co-hyperinflationists are trying to achieve, step by terrible step. This is what their articles are aimed at.

In Venezuela, M2 money was about 250,000 million in 2010 and now it’s about 2,800,000. The rate of growth is 48.3 percent a year. Venezuela’s economy is COLLAPSING. The rate of inflation is extremely high. How high? It’s outpacing M2 growth. It was officially 68.5% annualized at the end of 2014 and is possibly past 100% a year.

This was preceded by the institutional and legal steps by which the government gained direct access to the printing and spending press. The FED may be bad, but it is institutionally restrained. Even when it went through the QE series, the high-powered money it issued only partially went into M2. Most of it is piled up in bank reserves, a potential inflationary threat. What Brown et al want is to make the banks inject this money and/or to pass control over money injections directly to Congress and the Treasury. As in Venezuela and every other country that this has ever happened, the result is very high inflation or hyperinflation. For another example, read about Nationalist China’s hyperinflation. A student, Jay Habegger, wrote this article, and in it he displays an infinitely greater understanding of money economics than Ellen Brown and her fellow hyperinflationists.

Of very great interest is Habegger’s discussion of the 1935 Currency degree. It aimed to calm fears, but it all turned out to be a huge LIE. The Decree: “Instead of merely being an arm of the Nationalist Treasury, the Central Bank was to become a ‘banker’s bank’ distinct from the Nationalist Treasury.[17] Also, the Decree maintained that “plans of financial readjustment have been made whereby the National Budget will be balanced.”[18] And, according to Finance Minister Kung, “The government is determined to avoid inflation . . . .”[19]

If these steps had been followed, inflation would have been contained. The key one was that the Central Bank was supposed to be separated from the Treasury, the separation that Brown wishes to abolish.

However, they were not followed: “But, despite the provisions of the Decree, the Central Bank was never removed from the Treasury’s control. Even more fraudulent was the assurance that the budget would be balanced. Indeed, the government deficit increased in the years following the currency reform.”

Result: “Inflation began almost immediately. Eventually the inflation became so severe that it helped bring about the collapse of the Nationalist regime.”

I cannot emphasize enough just how stupid, ignorant and misinformed Brown and her fellow inflationists are. I do not think of them as deceitful, but I see them as badly miseducated and too intellectually lazy to look at the case completely and overcome their ignorance.

Willem Buiter is smart enough to publish a very long and detailed paper attempting to show that his recommendations have a respectable intellectual basis. However, although he is recommending government injections of cash, his recommendations do not have a sound basis in his own work. That’s because he doesn’t address what happens “after awhile”. Surely the first injection of notes is “found money” that people will tend to spend. Consumption may rise. But what happens when people get the idea that more and more issues will be forthcoming, because there is no constraint on them? Buiter writes: “What ‘gives’ ultimately, in a fully articulated dynamic general equilibrium model [of] nominal prices and wages, employment or output, is not our concern here.”

Well, it should be his concern if he’s going to go public with his monetary suggestions that can destroy an economy! It does not take pages and pages of equations to argue that helicopter drops of money may boost demand. It only takes a modest amount of additional research to discover that the story of helicopter money or government-injected funds hardly ends with the initial boom. In the worst cases, it leads to hyperinflationary busts, especially when the political and monetary institutions are altered legally such that the government injects irredeemable paper directly into an economy.

There are always articles telling us how different the U.S. government and situation are from those of Hungary or Weimar or Bolivia, but so what? Are we supposed to be complacent? The important thing is that the situation can change when government obligations begin greatly to exceed the taxes generated in the economy. That can happen here, and its likelihood is not negligible. According to some estimates, this situation is already baked in the cake. Furthermore, another important thing is that the institutions can be changed by the government, which is what I’m stressing here. If the government takes over the central bank or changes its incentive structure or absorbs its functions and begins to issue greenbacks directly, then the skids are greased for much higher inflation. This is what Ellen Brown and others like her are championing. It is absolutely the wrong thing to do.


2:08 pm on September 24, 2015