Inflation, as history has shown, may spiral out of hand very quickly.
Inflation has received a lot of attention recently. The Federal Reserve's huge money printing, which began in 2020, has now gotten people's attention, and it's no longer simply an issue for economists and free market proponents.
CNN last week reported that price increases recently hit a three-decade high and 25 percent of Americans say their standard of living has fallen. Speaking on CNBC’s “Squawk Box,” Home Depot founder Ken Langone noted that “inflation is a regressive tax [that] hits poor people hardest.” On CNBC’s sister network, MSNBC, host Joy Reid noted that “unless you’ve been living under a rock your money isn’t going as far as it used to, with higher prices on gas, food and your energy bills.”
Even the late night comedy show hosts are talking about inflation.
“Right now inflation is the one thing people hate even more than Jake Gyllenhaal,” Daily Show host Trevor Noah quipped. “It seems like everything is more expensive these days. Groceries are more expensive. Cars are more expensive.”
Noah wasn’t done.
“I went to a gas station today,” Noah joked, “and for a gallon of regular, it just said ‘kill yourself.’”
Inflation: How Worried Should We Be?
Most people are familiar with the term "inflation," but just in case you aren't, let's explain it. Inflation is defined as a rise in the amount of money available. That's basically it, and economist Joseph Salerno points out that this has been the conventional definition of inflation for centuries. Inflation was eventually given a second definition by economists, who defined it as "a broad and sustained increase in prices."
According to polls, Americans are concerned about "persistent price hikes." As FiveThirtyEight recently observed, some surveys show 87 percent of registered voters are “very” or “extremely” concerned about inflation.
Some are less worried. MSNBC's Stephanie Ruhel recently said the “dirty little secret” was that Americans can afford inflation.
“You’ve got the families of over 60 million kids on average getting $430 a month. For people on fixed incomes, older people on social security, they're getting those fixed payments adjusted next year up 5.9 percent or inflation. And the dirty little secret here, Willie, while nobody likes to pay more, on average we have the money to do so. Household savings hit a record high over the pandemic. We didn't have anywhere to go out and spend. And as we said a moment ago, we're expecting retail sales this holiday season to break records. For those who own their homes and the value of our homes are up. And while the stock market isn't the economy, you have over half of American households with some investment in the markets and the markets have hit record highs.”
Inflation affects certain people more than others, as Ruhel points out. Homeowners and Americans who invest in other assets such as equities, land, cryptocurrency, gold, and other commodities are often protected from the worst consequences of inflation to some extent. However, this simply emphasizes the fact that lower-income Americans, who rely more heavily on cash, bear the brunt of inflation.
Another important lesson from history concerning inflation is that it may increase very quickly.
Hyperinflation Starts as Inflation
We’ve already tackled the definition of inflation. So what’s hyperinflation?
Hyperinflation is essentially rapid inflation. Technically, it’s inflation that exceeds a 50 percent growth for a month. While there’s some talk among highly influential people that hyperinflation “is happening,” the reality is that the US is nowhere near hyperinflation right now. Inflation may have hit a 31-year high in October, but the 6.2 percent annualized rate is still far below hyperinflation.
It's also crucial to recognize that hyperinflation is usually preceded by regulation inflation. This isn't to say that inflation always leads to hyperinflation; rather, if the money supply continues to rise, inflation can lead to hyperinflation.
One of the most famous examples of hyperinflation happened in Germany during the Weimar era. Many of us have seen the images of women carrying laundry baskets full of marks to buy bread, or rooms plastered with useless money.
Inflation can spiral into hyperinflation just that fast.— Jon Miltimore (@miltimore79) November 24, 2021
Check out Oct. 1923. pic.twitter.com/qMtjdvS7GB
People frequently forget that Germany's hyperinflation began after a period of steady inflation that began in 1914, when the German government began to raise the money supply to pay the war effort, as Salerno points out. Hyperinflation didn't start until 1922, some years after the Treaty of Versailles and the official end of World War I, and it started slowly (if hyperinflation can ever be described as such).
Here's an example from Salerno: In June 1921, the cost of a daily newspaper was.30 marks. The price had climbed to 1 mark by May of the following year. A daily newspaper cost 8 marks just five months later. In February of the following year, I received 100 points. In September, there were 1,000 people.
Things began to spiral out of control in October 1923. A daily newspaper cost 2,000 marks at the start of the month, which was 2,000 times more than a year and a half before. By the 15th of October, the price had risen to 20,000, a ten-fold gain in just two weeks. What about at the end of the month? A newspaper cost one million marks in Germany.
Of course, this is only one example of hyperinflation. But the lesson is the same in each case: inflation may quickly escalate into hyperinflation.
The Only Path to Sound Money?
In one of his less known works—Denationalisation of Money—the Nobel Prize-winning economist F.A. Hayek noted that perhaps the greatest lesson of human history is that governments debase currencies. From Diocletian in Ancient Rome to Weimar Germany and beyond, Hayek saw that great powers, almost without exception, manipulated currencies and eroded the value of money.
This is why Hayek believed the only way to have sound money again was to take it “out of the hands of government.”
“[S]ince the function of government in issuing money is no longer one of merely certifying the weight and fineness of a certain piece of metal, but involves a deliberate determination of the quantity of money to be issued, governments have become wholly inadequate for the task and, it can be said without qualifications, have incessantly and everywhere abused their trust to defraud the people,” Hayek wrote.
Twice in its history, the United States has killed its central banks. The first national bank of the United States, signed into law in February 1791, died in 1811 when it’s charter expired. The second national bank, created five years later, was effectively killed by President Andrew Jackson in 1833 when he removed all federal deposits and let its charter eventually expire. Not until the twentieth century, following the Panic of 1907, was a third central bank created, which culminated in the Federal Reserve System we have to this day.
Considering the nation’s soaring inflation, $29 trillion debt, and rampant spending—all of which spawn from the Fed’s reckless monetary policies—it may be time to take Hayek’s advice.