Gold, Guns, and God: Thoughts on Hyperinflationary Fearmongering

Feb 16th, 2010

Most people, myself included, occasionally adhere to two conflicting ideas simultaneously. But after reading an article in the New York Times today about my beautiful yet sometimes intellectually stunted hometown, I needed to comment on one recurring theme: the supposedly imminent currency collapse.
Uncle Sam's Saw
My teabagger friends on Facebook often post about the guns they’re buying or the gold they’re investing in, ostensibly because the fiscal apocalypse is upon us due to Obama’s inflationary policies. I find it strange that alongside the breathless declarations that we’re soon to be just like Venezuela or Zimbabwe is simultaneous frustration at the fall in house values, retirement accounts, and salaries/wages– decidedly deflationary phenomena. Inflationary policies are designed primarily to reduce the burden of debt by increasing the money supply and accordingly boost consumer spending, and though they are clumsy they generally work in the short term. More jobs are out there, services are sustained during recessions, etc… Without such ‘stimulus’, deflation radically increases the burden of debt as variable values fall (i.e. home value) while related obligations (i.e. mortgage payments) remain fixed. Inflation may be a menace, but deflation is an even bigger monster. Right now the United States is issuing record debt, has a zero interest rate, and is practically BEGGING for inflation, and it hasn’t come. When it does, the Fed has ample room (i.e. the 20% interest rates of the 1970s) to stamp it out.

Additionally, hyperinflation can’t happen in a vacuum. If we were the lone nation struggling, our inflationary future would indeed be grim. But hyperinflation requires reevaluation relative to another currency of purported strength. Our weakness has to be exploited by another’s strength. So who then will cause the irrevocable slide of the dollar and hasten the survivalist epoch for which many libertarians (secretly) pine?


(1. The Euro? Hardly. Monetary union in Europe is becoming a disaster, with strong and competent economies (France, Germany) being hung by the weight of their more reckless neighbors. Greece combines corruption with some of the world’s highest debt relative to GDP. Spain’s housing boom was epic compared to ours, and unemployment is hovering at 20%. Ireland (hitherto “The Celtic Tiger”) had a tech and housing boom that couldn’t be sustained. These Euro states will continue to need bailouts from their more responsible neighbors, and thus in the near term the Euro will not bring about the downfall of the dollar.


(2. The Pound? The UK is too small, has its own high deficits and debt, and large social obligations.


(3. The Yen? Too small, and while it will continue to strengthen against the dollar, the implications aren’t really that dire.


(4. The Yuan? This is the one to worry about. China’s budgetary surpluses are enormous and their currency has been held artificially low (pegged to the dollar) for quite some time to keep their exports cheap, their wages low, their consumption low, their growth rate and competitiveness high, and their budget surpluses rolling in. The world is begging China to strengthen the Yuan and join the ranks of the rich consuming world, and if they do then inflation will come. But China is deeply trapped. A huge proportion of their foreign reserves are U.S. debt, so allowing their currency to strengthen and causing ours to weaken potentially devastates their return on investment. In other words, they have no interest in seeing us fail and (for now) won’t allow it. And a modest decline of the dollar against the Yuan would actually bring more jobs to America, as it would reduce Chinese competitiveness.

In other words, as ailments go, inflation is the chronic condition to be managed with care, but deflation is the acute sickness to be immediately remedied. So for the time being massive government spending is sensible. Now, if only Congress were better at spending it wisely…but that’s hoping for too much from petulant toddlers, now isn’t it?

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