John Mauldin included a chapter from his new book Endgame in his newsletter this week, and it’s a good one, taking a thorough look at historical examples of Inflation and Hyperinflation.
The most interesting part of the chapter for me was its conclusion – there’s a quote from historian Peter Bernholz, the man who literally wrote the book on inflation. When asked about the prospects for hyperinflation in the US, Bernholz commented:
“But does this mean that inflation may evolve into a hyperinflation in the United States? I believe not. Though it is true that budget deficits with government expenditures covered by 40 percent or more through credits have historically led to hyperinflation, it has been stressed in Monetary Regimes and Inflation that it is not only the size of these credits but also their composition that is important. This is noted in the book, thus:
“‘It will be demonstrated by looking at 12 hyperinflations that they have all been caused by the financing of huge budget deficits through money creation” [emphasis added]. This expresses the fact that only credit extended directly or indirectly by the monetary authorities to the government leads to the creation of money, that is, an increase of the monetary base. This is not true for borrowings taken up in the capital markets if they are not resold to the Fed. Looking from this perspective at the U.S. deficit, by far not all of the credits borrowed by the government were financed by the Fed.
‘According to preliminary and rough estimates, not 40 percent but “only” about 13 percent of U.S. expenditures are presently financed this way. Moreover, in discussing this problem it has to be taken into account that about two-thirds of dollar bills are estimated to circulate abroad. This—together with the fact that incredibly huge holdings of dollar assets are owned especially by the central banks of China, India, and the Gulf States—may pose other and later dangers. But these dangers will be, except for a return of the dollar bills and a purchase of foreign-owned dollar assets by the Fed, of a different nature. Inflation may rise more or less strongly during the next years, but there is presently no danger of a hyperinflation in the United States.’”
Mauldin thinks Bernholz is being a little too easy on the US – but it was his comment about monetization and inflation in the UK that I found most interesting:
Bernholz is likely being far too generous to the Fed and Congress. He is not counting more than $700 billion worth of mortgage bonds by Fannie and Freddie that the Fed bought with money it printed. Arguably, if other central banks had not been dumping their mortgage-backed securities, the Fed would have monetized 100 percent of the U.S. deficit through Treasury purchases. Interestingly, the only country in the world that currently fits the bill for hyperinflation is the United Kingdom, where 100 percent of the budget deficit was monetized by the central bank. Unsurprisingly, ever since, inflation in the United Kingdom has consistently overshot the Bank of England’s own forecasts. Apparently, they don’t see a connection.
Quietly (at least to us Americans) the UK has been running the printing presses harder and faster than “The Bernanke!”
(Recommended: Want the low down on QE2? Here’s a hilarious cartoon spoof)
It’s too bad for the Brits that the age of empire building is done. Back in the day, they’d have pillaged another country or colonial state for the difference (speaking of which ever wondered what the Parthenon is doing in the British Museum?)
Nowadays, they’re reduced to money printing, just like the rest of us civilizations in demographic decline!