History shows that hyperinflation, although associated with money printing and high debt levels, is not caused by these conditions but rather the collapse of confidence in government.
A discussion about hyperinflation is a discussion about money and its value. Without money, one has to barter. A barter system is inefficient, as you need to find someone who has what you want and wants what you have. Money is a very convenient intermediary – but if you are to accept money for your produce, you must be confident that you can exchange it for other goods that you need. In other words, the money must have a value.
There have been many monies through history, from shells and sheets of copper to gold coins and – as it mostly the case today – paper. Paper money has been backed by gold, and was transferable with gold, but is now backed by nothing other than the promise of politicians to pay their debts. The promise of a politician is not worth much, but it’s enough as long as governments behave themselves. If they can demonstrate that they are able to pay their debts, then the markets have confidence in the money. This is the basis of the value of modern fiat currencies: confidence.
The classic explanation for hyperinflation is the excessive printing of money. What people mean by this is that governments issue an excessive amount of debt for which there is no demand and so the reserve bank produces money out of thin air and buys this debt, thereby financing the government. This excessive production of money produces inflation and satisfies our understanding of supply and demand. But hyperinflation requires something more than just the printing of money.
Studies also show that hyperinflation occurs when a country has a high debt-to-GDP ratio. Unfortunately, the debt-to-GDP ratio present at the start of hyperinflation varies, so it is not a good predictor of hyperinflation.
Hyperinflationary periods
There have been a number of hyperinflationary periods in the past. Nearly all of the information below is from the writings of Martin Armstrong of Armstrong Economics, including the conclusion on the cause of hyperinflation. I hope what follows adequately summarises his lifetime’s research.
Rome 260AD
From the mid-third century, numerous wars had bankrupted the Roman state and the weights of coins dropped rapidly as the state tried to pass off inferior coins. This produced inflation. Then, in 260AD, Emperor Valerian I was captured by the Persians. Roman Emperors had been killed in battle before but never captured and certainly never used as a footstool for the Persian King. After Valerian died, he was stuffed and kept as a trophy. This was unprecedented and destroyed the confidence the Romans had for their state and its money. This precipitated the collapse of the Roman Silver Denarius between 260 and 268AD. There were also separatist movements at the time and the Roman Empire was fragmenting. As a result of this loss in confidence, economic activity fell and people hoarded their wealth. This is why most discoveries of buried Roman coins date from this period. From within the Roman Empire this period was experienced as a hyperinflationary period but in real terms it would have been seen as deflationary, as economic activity fell and the value of productive assets fell. Rome was the first city in the world to have a population of 1 million but eventually its population fell to around 30 000.
Weimar Republic 1922
The Weimar Republic arose after a communist revolution in Germany in 1918. This was a difficult time for Germany, which had lost the First World War, and was being compelled to pay massive reparations. The communists didn’t help; they had even invited Lenin to incorporate Germany into Russia. Confidence was low, the wealthy had just witnessed the bloodshed in the Russian Revolution and there was brewing inflation; wealth was expatriated and gold hoarded. In 1923, Germany defaulted on its reparation payments and started printing money. However, the straw that broke the camel’s back was the Weimar Government’s passing a law to force citizens to invest a percentage of their wealth in government bonds … ‘prescribed assets’ in the contemporary vernacular. This was just theft, and confidence in the government collapsed, along with the value of money and debt. Hyperinflation ensued and the Reichsmark went to zero.
Zimbabwe
In Zimbabwe, the government was under political and monetary pressure, but it was only when it started expropriating farms that confidence in it collapsed and hyperinflation began. As all know, the Zimbabwe Dollar disappeared.
The cycle is similar throughout history and the reason is that human nature is the only constant through time. Democracy leads to socialism which leads to collapse, which, as Margaret Thatcher correctly pointed out, is because socialist governments eventually run out of other people’s money.
Collapse of confidence
As this process unfolds, confidence falls and people hoard wealth, and the value of money falls along with economic activity and tax revenues. Governments counteract that by borrowing and then printing money, which seems reasonable at the time.
They never consider reform – and the present popularity of Modern Monetary Theory is noteworthy. Eventually, if governments start to steal, confidence disappears entirely and hyperinflation is the result. Hyperinflation is not the result of the printing of money, but of the collapse of confidence. It is, rather, the collapse of confidence that causes the printing of money.
Perhaps Hegel was right when he wrote that ‘what we learn from history is that we don’t learn from history’.
It is no exaggeration to state that confidence in South Africa’s African National Congress (ANC) government has plummeted over the last decade. We were all the beneficiaries of the excellent investigative journalism that exposed the antics of the Guptas, Zuma and their acolytes. The imagery was so vivid that you could hear the grunts and squeals as they gorged themselves and fought over tasty morsels.
Then we witnessed the destruction of our economy via the government’s authoritarian and extreme response to Covid-19, a rather unimpressive disease. Perhaps the ANC government truly believes that the ‘Great Reset’ promoted by Marxists such as Klaus Schwab of the World Economic Forum is a worthy plan. Or perhaps they were bribed.
The government’s ability to borrow more money at present is severely limited. Money printing is next in line, but this requires the approval of the South African Reserve Bank. This is not forthcoming at the moment, hence the political attacks on the Reserve Bank. The government has now proposed changes to legislation to allow expropriation without compensation (EWC), and prescribed assets are being discussed. The cycle is unfolding in front of us. If the government starts to steal private assets, history is clear: confidence in the government will collapse, along with their debt and their currency, and hyperinflation will result.
Insanity
Incredibly, though, we read of the Agricultural Business Chamber (Agbiz) supporting the proposed EWC legislation. Gabriel Crouse of the Institute of Race Relations (IRR) has repeatedly tried to get to the bottom of this insanity.
Equally incredible is that Agbiz writes in its recent article in Farmer’s Weekly, ‘SA must take a “bold step” towards fiscal sustainability’, that it has a plan that requires a ‘social compact between government, business, labour and communities’. In theory, there is a social compact, but could it have survived the Zuma orgy, the Covid-19 destruction and the murder presently taking place on farms? Surely there has to be some doubt, especially when, a full eight years ago, the residents of Gauteng simply refused to pay their e-tolls. That was the Gauteng residents tearing up the ‘social compact’.
Anecdotally, I was talking a few years ago to the leader of an important business in Gauteng and the topic of farm attacks came up. His immediate response was that the farmers deserved it. I was stunned into silence. Is it possible that he, at the peak of his career, had not understood that the ANC’s vilification of farmers in the media was an intentional strategy to ensure that when the government came to take their land no one would stand up to defend them? Do business leaders drink the propaganda Kool-Aid so easily?
They ignored him
IRR CEO Frans Cronje has been pounding the table on this topic for at least a decade. He warned AgriSA 10 years ago, but they ignored him. Surely AgriSA is there to defend farmers? Yet, it doesn’t seem to be doing so, and doesn’t even seem to want farmers to defend themselves. When the farmers stand up, as at Senekal, and start to defend themselves through mass action, Christo van der Rheede of AgriSA seeks during an interview on eNCA to dissuade them.
The bikers even turned up in Senekal to protest, and they don’t receive a cent from the farmers, unlike AgriSA, to whom many farmers’ unions are affiliated and to which they pay subscriptions.
What does one make of all this?
Perhaps Agbiz has an agenda – but, at the same time, they can’t possibly think that hyperinflation would be good for business no matter what cunning plan they might have. And why are business leaders in South Africa so silent on the topic of EWC? Are they really all just clueless? Some probably are, but the answer is likely simpler and is probably best expressed by the German Lutheran pastor, Martin Niemöller, when he wrote of the Nazis in Germany:
First they came for the socialists, and I did not speak out –
Because I was not a socialist.
Then they came for the trade unionists, and I did not speak out –
Because I was not a trade unionist.
Then they came for the Jews, and I did not speak out –
Because I was not a Jew.
Then they came for me – and there was no one left to speak for me.
[Picture: Harry Strauss from Pixabay]
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