Weimer America: Will John Williams be Discredited?

We here at Running of the Bulls believe that the odds of consumer price inflation in the future are elevated.  But is hyperinflation coming?  And I mean hyperinflation, as articulated by John Williams.

If we have hyperinflation, which I see coming not too far down the road, that would be so disruptive to our system that it would result in the cessation of many levels of normal economic commerce, and that would throw us into a great depression, and one worse than was seen in the 1930s.

What kind of hyperinflation are we talking about?

I am talking something like you saw with the Weimar Republic of the 1930s. There the currency became worthless enough that people used it actually as toilet paper or wallpaper. You could go to a fine restaurant and have an expensive dinner and order an expensive bottle of wine. The next morning that empty bottle of wine is worth more as scrap glass than it had been the night before filled with expensive wine.

We just saw an extreme example in Zimbabwe. ... Probably the most extreme hyperinflation that anyone has ever seen. At the same time, you still had a functioning, albeit troubled, Zimbabwe economy. How could that be? They had a workable backup system of a black market in U.S. dollars. We don't have a backup system of anything. Our system, with its heavy dependence on electronic currency, in a hyperinflation would not do well. It would probably cease to function very quickly. You could have disruptions in supply chains to food stores. The economy would devolve into something like a barter system until they came up with a replacement global currency.

Now, perhaps John Williams is correct, I do not know.  But this comes across to me as shrill alarmism, no different than the perma-bulls writing books entitled Dow 36,000 or Dow 100,000 in 1999 at the peak of The Tech Bubble. 

This is Williams's argument.

What can we do to avoid hyperinflation? What if we just shut down the Fed or something like that?

We can't. The actions have already been taken to put us in it. It's beyond control. The government does put out financial statements usually in December using generally accepted accounting principles, where unfunded liabilities like Medicare and Social Security are included in the same way as corporations account for their employee pension liabilities. And in 2008, for example, the one-year deficit was $5.1 trillion dollars. And that's instead of the $450 billion, plus or minus, that was officially reported.


These numbers are beyond containment. Even the 2008 numbers, you can take 100 percent of people's income and corporate profit and you'd still be in deficit. There's no way you can raise enough money in taxes.

What about spending?

If you eliminated all federal expenditures except for Medicare and Social Security, you'd still be in deficit. You have to slash Social Security and Medicare. But I don't see any political will to rein in the costs the way they have to be reined in. There's just no way it can be contained. The total federal debt and net present value of the unfunded liabilities right now totals about $75 trillion. That's five times the level of GDP.

Now, I definitely have concerns.  The math of future unfunded liabilities is frightening, and I will be long gone from this country well before it comes to pass if this is the path we remain on.

However, the massive unfunded liabilities can be changed by a simple stroke of a pen.  Increasing the age that someone can receive full Social Security or Medicare benefits to 72 or 75 will wipe out most of those trillions of dollars of future obligations.  The funding gaps can also be lowered by investing trust contributions into instruments other than government obligations, such as equities, real estate, private equity, etc. as other countries have.

Williams's argument implies that Americans will allow the country to collapse rather than reform the system.  I harbor deep skepticism of this view.  First, Americans are perhaps the most dynamic and optimistic people in the world.  Americans are not prone to sticking a gun to their collective heads and pulling the trigger.  Certainly, Americans are not immune to political paralysis.  Argentina was once a prosperous country as well.  However, America has gone through far worse and came through intact.

Second, I heard the same thing in Canada in the mid-1990s.  Canada's debt to GDP was higher than America's is today.  Productivity was (and still is) low.  The loonie traded at 65 cents. Canadians complained that their government could not do anything right.  Canadians speculated about the collapse of the loonie and the IMF setting up camp at the Chateau Laurier across the street from Parliament in Ottawa.  Today, the hard-money crowd and Williams's intellectual brethren are all ga-ga over Canada.  Now, it is true that we Canadians are intelligent, hard-working and attractive, but we are not that much different than Americans. (Though better-looking for sure! - ed.)

This hyperinflation argument has a 1999-feel to it, only as the flipside to the perennial bullishness of the late-1990s.  If I am correct, I wonder if John Williams will be discredited in the eyes of those who are sure collapse is imminent, just like the authors of Dow 36,000 / Dow 100,000 and the other prophets of the Tech Bubble?

ADDENDUM - Greg Mankiw explains why the explosion in the monetary base is not inflationary.  I am not sure if I agree, but it is a sound argument why inflation, let alone hyperinflation, is not down the road.

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