When Inflation Wipes out a Country's Currency...

[piezoe]

Heck, I'm as open to correction as anybody else lol.
Fire away.
The response above referring to war is valid imho.
"When all else fails, they take you to war."
War is also an excellent distraction from crimes, corruption and incompetence.

So, sure, I'm open to hear what you have to add to the stew, lol.

The article is about global U.S. debt. The U.S. is one of the nations that has no debt! And that is despite what a lot of classically trained economists believe and what the public believes. And it is despite the sale of Securities by the Treasury in an operation that appears to be "borrowing." The sale of these Treasuries is nothing like what it appears to be however.. There are a number of other nations that have no debt as well. Any nation that issues what appears to be debt instruments denominated only in their own currency has no debt. Nations that have been forced to issue debt instruments denominated in currencies other than their own have real debt. Russia has real debt. Argentina has real debt. Japan and the U.S., for example, have no debt.

The EU monetary union nations are a special case. The ECB issues debt only in Euros, but each nation has its own bonds, also denominated only in Euros. There is no "Euro bond", and that is why I, and others, say that the EU monetary union is incomplete!!! The situation there is similar to, but not the same as, the situation in the United States for individual States. You can see this is getting rather too complicated for me to go into in enough detail here in this forum to explain enough for you to understand. So I won't try to do that now.

None of what I have pointed out however should be interpreted as suggesting that nations like the U.S. and Japan can print and spend into their economies without limit forever. They can't do that without long-range adverse consequences. Nevertheless I appears to me that these long range consequences are not well understood at present.

It is often said that fiat money is not backed by anything except perception of its value based on what can be bought with it. This, too, is misleading. Although perception of the value of a currency is an important market factor, fiat currencies do have fundamental backing. Fiat currencies are fundamentally backed by both the productivity and the power to tax of the nations issuing them.

The reason Zimbabwe's currency lost value was not because they printed too much, which they did!, but because Zimbabwe's productivity plummeted in comparison to Rhodesia's. It was the steep drop in productivity that led to excessive printing which led in turn, in Zibabwe's case, to hyperinflation..

 

[cdcaveman]

. You can see this is getting rather too complicated for me to go into in enough detail here in this forum to explain enough for you to understand. So I won't try to do that now

You took a lot of time even though you said y ok u weren't going to ..is this ment to be condescending? Or is this how you talk to people generally

 

[easymon1]

The article is about global U.S. debt. The U.S. is one of the nations that has no debt! And that is despite what a lot of classically trained economists believe and what the public believes. And it is despite the sale of Securities by the Treasury in an operation that appears to be "borrowing." The sale of these Treasuries is nothing like what it appears to be however.. There are a number of other nations that have no debt as well. Any nation that issues what appears to be debt instruments denominated only in their own currency has no debt. Nations that have been forced to issue debt instruments denominated in currencies other than their own have real debt. Russia has real debt. Argentina has real debt. Japan and the U.S., for example, have no debt.

The EU monetary union nations are a special case. The ECB issues debt only in Euros, but each nation has its own bonds, also denominated only in Euros. There is no "Euro bond", and that is why I, and others, say that the EU monetary union is incomplete!!! The situation there is similar to, but not the same as, the situation in the United States for individual States. You can see this is getting rather too complicated for me to go into in enough detail here in this forum to explain enough for you to understand. So I won't try to do that now.

None of what I have pointed out however should be interpreted as suggesting that nations like the U.S. and Japan can print and spend into their economies without limit forever. They can't do that without long-range adverse consequences. Nevertheless I appears to me that these long range consequences are not well understood at present.

It is often said that fiat money is not backed by anything except perception of its value based on what can be bought with it. This, too, is misleading. Although perception of the value of a currency is an important market factor, fiat currencies do have fundamental backing. Fiat currencies are fundamentally backed by both the productivity and the power to tax of the nations issuing them.

The reason Zimbabwe's currency lost value was not because they printed too much, which they did!, but because Zimbabwe's productivity plummeted in comparison to Rhodesia's. It was the steep drop in productivity that led to excessive printing which led in turn, in Zibabwe's case, to hyperinflation..

That's a new wrinkle on me.
Thank you.
Whenever you get the urge to expand on this, I'm all ears.
One question that light's up, if there is no debt, why then is it said that the us pays interest commonly attributed to 'the debt'?

 

[piezoe]

That's a new wrinkle on me.
Thank you.
Whenever you get the urge to expand on this, I'm all ears.
One question that light's up, if there is no debt, why then is it said that the us pays interest commonly attributed to 'the debt'?

U.S. Money takes two forms: 1) U.S. Treasuries. non-readily spendable, interest bearing; 2) The form we are familiar with: the readily spendable, non-interest bearing form. All private sector U.S. money, regardless of which form it is in, is a liability of the U.S. Treasury.

Treasuries serve two purposes: 1) They are an interest bearing store of money; 2) They are a tool of the central bank. Treasuries are not issued for the purpose of raising money as commonly believed. The U.S. Always "money finances" it purchases. This financing takes two forms: 1) Tax Revenue, or 2) "Printing" caused by deficit spending. The printing takes place when the Central bank covers a Treasury overdraft. This is the only point at which new permanent money enters the private sector. Not that the Treasury issues securities in the amounts of its overdrafts after, sometimes long after, it has already spent the new money Congress's deficits have created. In actual borrowing, one borrows and then spends. The treasury spends and then appears to borrow, but isn't. What it is actually doing is exchanging newly created money that has already been spent into the private for an interest paying form of non-readily spendable money, i.e., Treasury securities. Congress caused this new money to be created when it authorized spending in excess of tax revenues. Neither the Treasury nor the Central Bank has any control over how much new money will be created! But the Central Bank does exercise control over what form that new money will take once it is in the private sector. (vide infra)

When the Central Bank buys Treasuries, which they can do without limit up to the total amount of Treasuries held in private sector, it may appear as though they are creating new money to do so. They are not. To understand why they are not, we have to understand that Treasuries are just an interest paying, non-readily spendable, form of money. So what the Central Bank is really doing when they buy Treasuries is just converting one form of money into another. This can get quite confusing until you realize that when interest or principle is paid by the U.S. Treasury on Treasuries held on the Central Bank's balance sheet, the proceeds, less expenses, flow directly back to the U.S. Treasury. (Of course a person who believes the Central Bank is a private for profit bank will never be able to understand any of these operations correctly. The U.S. Central Bank was once largely under private bank control, but that ended with the banking acts of the 1930's which created the FOMC.)

The money the government creates via deficit spending -- there is no other way -- gets into the private sector by being spent by the government for goods and services (usually). Minsky called this money "outside money," and many economists and money theorists have adopted this terminology. Money credited via fractional reserve banking within the private sector Minsky called "inside money." This inside, or "credit money", dominates the private sector money supply. Inside money is temporary money. It appears when a loan is made and disappears when the loan is paid off. Outside money is permanent until the Government runs a surplus. Surpluses have the effect of reducing the net outside money in the economy. The Money that flows from lender to borrower and back to lender within the the private sector is inside money. The money that flows from government to the private sector or from the private sector to government is outside money.

 

[piezoe]

ERRATA: in post #24 above.

paragraph 2, line 4: replace "Not" with "Note"

paragraph 4, line 3: replace "credited" with "created"

 

[cdcaveman]

Sounds like you created a real technical to response to a simple situation. Inflation is theft

 

[piezoe]

"It is impossible to know in advance which group will be favored by a definite inflationary or deflationary measure and to what extent. These effects depend on the whole complex of the market data involved. They also depend largely on the speed of the inflationary or deflationary movements and may be completely reversed with the progress of these movements. 3. At any rate, a monetary expansion results in misinvestment of capital and overconsumption. It leaves the nation as a whole poorer, not richer. These problems are dealt with in Chapter 20. 4. Continued inflation must finally end in the crack-up boom, the complete breakdown of the currency system. 5. Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous." Ludwig Von Mises

I would like to comment on this von Mises quote you have posted. Not everything von Mises believed has been shown to be wrong. He did offer some valuable insight. For example this quote:

"At any rate, a monetary expansion results in misinvestment of capital and overconsumption."​

Our common experience tells us that too rapid a monetary expansion does favor mis-investment and over-consumption. Certainly there is nothing within our knowledge of human behavior that would suggest otherwise.

However this quote below is also a von Mises quote:

"But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."​

This ignores the dangers of deflation in any economy that runs on credit supplied by fractional reserve banking. von Mises was influenced by the dangers of fractional reserve banking during the early 20th Century up until the world-wide Great Depression of the 1930s. Drastic revision in the banking laws during the Depression eliminated depositor's risk due to bank insolvency . Because of this, von Mises ideas did not age well after the 1930's; yet up until he died at age 92 in 1973 he seemed never to appreciate the benefits of fractional reserve banking in a post 1930's world. In particular, he seemed not to appreciate how any significant amount of deflation would not only negate these benefits, but risk economic depression. The reason is that if over time money increases in buying power those who have fixed interest debt will experience an increase in the real rate of interest they pay on their loans! This would be disastrous in any economy that depends heavily on credit . Significant deflation must be avoided. On the other hand a modest amount of inflation is actually helpful to those with debt as it reduces the real rate of interest they pay; thus reducing the cost of credit over time. This is hugely important to the bulwark that undergirds economic opportunity in modern economies of the democratic nations.

 

[engineering]

The reason Zimbabwe's currency lost value was not because they printed too much, which they did!, but because Zimbabwe's productivity plummeted in comparison to Rhodesia's. It was the steep drop in productivity that led to excessive printing which led in turn, in Zibabwe's case, to hyperinflation..

The currency lost value because they printed too much full stop.
There may have been events that lead to the choice of that action, but the printing is the cause of the devaluation.

The notion that dollar denominated debt isn't real debt is silly. Economies can be destroyed by internal or external factors. When you're starving in the street it's real either way.

The issue is not that the govt would be able to print enough money to pay it's debt. The issue is that by doing so it could destroy the value of the dollar as a means to fund the ongoing operations of the government.

 

[cdcaveman]

I would like to comment on this von Mises quote you have posted. Not everything von Mises believed has been shown to be wrong. He did offer some valuable insight. For example this quote:

"At any rate, a monetary expansion results in misinvestment of capital and overconsumption."​

Our common experience tells us that too rapid a monetary expansion does favor mis-investment and over-consumption. Certainly there is nothing within our knowledge of human behavior that would suggest otherwise.

However this quote below is also a von Mises quote:

"But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."​

This ignores the dangers of deflation in any economy that runs on credit supplied by fractional reserve banking. von Mises was influenced by the dangers of fractional reserve banking during the early 20th Century up until the world-wide Great Depression of the 1930s. Drastic revision in the banking laws during the Depression eliminated depositor's risk due to bank insolvency . Because of this, von Mises ideas did not age well after the 1930's; yet up until he died at age 92 in 1973 he seemed never to appreciate the benefits of fractional reserve banking in a post 1930's world. In particular, he seemed not to appreciate how any significant amount of deflation would not only negate these benefits, but risk economic depression. The reason is that if over time money increases in buying power those who have fixed interest debt will experience an increase in the real rate of interest they pay on their loans! This would be disastrous in any economy that depends heavily on credit . Significant deflation must be avoided. On the other hand a modest amount of inflation is actually helpful to those with debt as it reduces the real rate of interest they pay; thus reducing the cost of credit over time. This is hugely important to the bulwark that undergirds economic opportunity in modern economies of the democratic nations.

Keep reading, read some Rothbard on the great depression.. Fractional reserve banking is a special privilege granted to banks that other persons or entities do not have the privledge of having. the idea of holding only 10% of what your loan would be impossible with out the gov.. you can say whatever you want but its expansionary in nature.. and basically Mises didn't believe in artificial expansion of the currency period.. his work has aged very well to describe the credit cycle with respect to current monetary policies around the world ..

 

[piezoe]

There may have been events that lead to the choice of that action, but the printing is the cause of the devaluation.

Although it is common to attribute hyperinflation to excessive "printing" this is virtually never the root cause, but always a symptom of an underlying economic failure. The failure of the currency. in Zimbabwe's case, was due to plummeting farm production. Zimbabwe depended heavily on imports. When Zimbabwe was Rhodesia it was the "bread basket of Africa" and farm exports provided the foreign exchange reserves the country needed for imports. Once the farm production was destroyed as a consequence of the revolution, there was no way to generate sufficient foreign reserves. The government then simply printed money to pay creditors, but these creditors found there was nothing of value to buy. Naturally, they didn't want Zimbabwe's money, and demand for Zimbabwe's money completely dried up. Zimbabwe eventually realized the root cause of their hyper-inflation. Today Zimbabwe is offering attractive incentives for agricultural experts to relocate to Zimbabwe.

The excessive printing you are aware of was a result of plummeting farm production and with it the drying up of foreign reserves. Printing was a symptom of the root cause. This is always the case. Excessive printing is always a symptom of an underlying problem. I share Randall Wray's opinion that often hyperinflation can be traced to a breakdown in the tax structure. However in the case of Zimbabwe there is general agreement that the root cause of hyperinflation was a collapse of the farm productivity after Mugabe awarded his freedom fighters the land from nationalized farms.