Deficit Owls | Merely "Printing Money" Is Not What Causes Hyperinflation @deficitowls5296 | Uploaded March 2017 | Updated October 2024, 3 hours ago.
Rohan Grey, of the Modern Money Network, on with Steve Grumbine of Real Progressives, discussing the causes of hyperinflation. Although the conventional wisdom is that hyperinflation is caused by simply "printing too much money," MMT asserts that this is not the case, and has never been the case. Rather, hyperinflation is almost always caused by some sort of political, ecological, or other economic crisis or breakdown, which in turn is reflected in the monetary system.
The simplest cause of hyperinflation is supply-chain collapse. If the real productive sector in the economy suddenly becomes unable to meet demand for goods on a wide scale (for instance, if factories were decimated after a war, or farm output collapsed due to a famine), then prices must rise. If the demand is unable to subside (such as for essential goods like food) and supply cannot be restored or replaced (by substitution or imports) then prices will continue rising and won't stop. This is without regard to the size of the money supply. In fact, the money supply tends to endogenously grow: as prices rise, people need more money to make the larger transactions, so they borrow more from banks and liquidate assets with the central bank, growing the money supply. In this way, "printing money" is actually a consequence, not a cause, of hyperinflation. If the government were to try to clamp down on the money supply, chances are that 1) they wouldn't be able to, and/or 2) people would start using other things as money.
(Government deficits can also become a positive feedback mechanism in this way, because the government pays current prices but tax collections are calculated on a lag, so the deficit will tend to widen, making the problem worse.)
This is what happened in Zimbabwe and in Venezuela. In Zimbabwe, racial politics trumped economics, leading the Mugabe government to evict all the experienced white farmers with inexperienced black ones, with little provision for transition or training. The result was that farm output collapsed by 80%. Prices must rise in that situation. In Venezuela, the government imposed price controls below the cost of production, which forced most of the private sector out of business. Due to their large foreign debt in dollars, they restricted imports (which would lead to loss of dollar reserves for the government, and therefore inability to service its dollar-denominated debt), leading to severe shortages that could not be solved. In this situation, prices must rise.
In Weimar Germany, the situation was caused by huge imposition of Germany of reparations for WW1, payable in gold and foreign currencies. When it became clear that Germany didn't have this foreign currency, and that there would be no debt relief from Germany's creditors, Germany was forced to sell its own currency in the foreign exchange markets, in amounts of something like 30% of GDP, which drove down the exchange rate. This increased the cost of imports and, coupled with foreign occupation of industrial lands and mass worker strikes reducing domestic capacity too, led to elevated inflation in Germany. Workers began to demand that their wages be indexed to inflation, leading to a self-feeding spiral: as the exchange rate went down, wages went up, leading to higher prices, leading to a lower exchange rate and higher wages, leading to higher prices...This is called a "wage-price spiral."
So clearly, the cause of hyperinflation is not simply the government "spending too much." Each case is unique, but the elements that tend to be present can include fixed exchange rates, foreign-denominated debt, crisis of supply, indexation of prices or wages, loss of ability to enforce taxes, political or other social breakdown, or losing a war.
Read a bit more about hyperinflation here: pdfs.semanticscholar.org/e20b/05c4630543d7506d93b89713685c9372717a.pdf
Read about why it's not simply caused by government debt or deficits: realprogressivesusa.com/news/economic-issues/2017-01-26-what-if-the-government-prints-money-to-pay-the-national-debt
Some statistical evidence that money supply growth doesn't cause inflation: ineteconomics.org/perspectives/blog/rapid-money-supply-growth-does-not-cause-inflation
More about the specific case of Weimar Germany: socialdemocracy21stcentury.blogspot.com/2014/04/joan-robinson-on-weimar-hyperinflation.html
More about the specific case of Zimbabwe: bilbo.economicoutlook.net/blog/?p=3773
Watch the whole video here: youtu.be/D3hu3rt2SOI
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Rohan Grey, of the Modern Money Network, on with Steve Grumbine of Real Progressives, discussing the causes of hyperinflation. Although the conventional wisdom is that hyperinflation is caused by simply "printing too much money," MMT asserts that this is not the case, and has never been the case. Rather, hyperinflation is almost always caused by some sort of political, ecological, or other economic crisis or breakdown, which in turn is reflected in the monetary system.
The simplest cause of hyperinflation is supply-chain collapse. If the real productive sector in the economy suddenly becomes unable to meet demand for goods on a wide scale (for instance, if factories were decimated after a war, or farm output collapsed due to a famine), then prices must rise. If the demand is unable to subside (such as for essential goods like food) and supply cannot be restored or replaced (by substitution or imports) then prices will continue rising and won't stop. This is without regard to the size of the money supply. In fact, the money supply tends to endogenously grow: as prices rise, people need more money to make the larger transactions, so they borrow more from banks and liquidate assets with the central bank, growing the money supply. In this way, "printing money" is actually a consequence, not a cause, of hyperinflation. If the government were to try to clamp down on the money supply, chances are that 1) they wouldn't be able to, and/or 2) people would start using other things as money.
(Government deficits can also become a positive feedback mechanism in this way, because the government pays current prices but tax collections are calculated on a lag, so the deficit will tend to widen, making the problem worse.)
This is what happened in Zimbabwe and in Venezuela. In Zimbabwe, racial politics trumped economics, leading the Mugabe government to evict all the experienced white farmers with inexperienced black ones, with little provision for transition or training. The result was that farm output collapsed by 80%. Prices must rise in that situation. In Venezuela, the government imposed price controls below the cost of production, which forced most of the private sector out of business. Due to their large foreign debt in dollars, they restricted imports (which would lead to loss of dollar reserves for the government, and therefore inability to service its dollar-denominated debt), leading to severe shortages that could not be solved. In this situation, prices must rise.
In Weimar Germany, the situation was caused by huge imposition of Germany of reparations for WW1, payable in gold and foreign currencies. When it became clear that Germany didn't have this foreign currency, and that there would be no debt relief from Germany's creditors, Germany was forced to sell its own currency in the foreign exchange markets, in amounts of something like 30% of GDP, which drove down the exchange rate. This increased the cost of imports and, coupled with foreign occupation of industrial lands and mass worker strikes reducing domestic capacity too, led to elevated inflation in Germany. Workers began to demand that their wages be indexed to inflation, leading to a self-feeding spiral: as the exchange rate went down, wages went up, leading to higher prices, leading to a lower exchange rate and higher wages, leading to higher prices...This is called a "wage-price spiral."
So clearly, the cause of hyperinflation is not simply the government "spending too much." Each case is unique, but the elements that tend to be present can include fixed exchange rates, foreign-denominated debt, crisis of supply, indexation of prices or wages, loss of ability to enforce taxes, political or other social breakdown, or losing a war.
Read a bit more about hyperinflation here: pdfs.semanticscholar.org/e20b/05c4630543d7506d93b89713685c9372717a.pdf
Read about why it's not simply caused by government debt or deficits: realprogressivesusa.com/news/economic-issues/2017-01-26-what-if-the-government-prints-money-to-pay-the-national-debt
Some statistical evidence that money supply growth doesn't cause inflation: ineteconomics.org/perspectives/blog/rapid-money-supply-growth-does-not-cause-inflation
More about the specific case of Weimar Germany: socialdemocracy21stcentury.blogspot.com/2014/04/joan-robinson-on-weimar-hyperinflation.html
More about the specific case of Zimbabwe: bilbo.economicoutlook.net/blog/?p=3773
Watch the whole video here: youtu.be/D3hu3rt2SOI
Follow Deficit Owls on Facebook and Twitter:
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And follow our sister page, Modern Money Memes:
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