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"It was horrible! Horrible! Like lightning had struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery store were empty. There was nothing you could buy with your paper money." In 1993, Friedrich Kessler, law professor at Harvard, described an event from his past – the Weimar Republic's hyperinflation. He might have been describing the future too.
All over the world, the inflation pumps are running hot. In Australia, the government recently announced a stimulus programme. Cheques of $1,000 a child will be sent to deserving parents. Senior citizens will get $1,400. The Japanese have a ¥5trn programme, while Europeans are in for $1.8trn. But in America, the pumps are practically burning up. The Americans have put up $8.5trn, including $120bn to bail out a group of foreign countries, as well as the homeland. A trillion here... a trillion there... pretty soon you're broke. But who's worrying?
"I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States," Ben Bernanke assured Congress, adding that "a determined government can always generate higher spending and hence positive inflation". So determined was the US Fed since 1970 that the dollar lost more than 75% of its purchasing power. But now, all over the world, prices are falling. Inflation is no longer a sure thing. For the first time since the 1930s America, and many other nations, run the risk that inflation rates will turn negative.
Ben Bernanke has been wrong about many things; but as to the Fed's ability and determination to destroy the dollar, he is almost certainly right. The burden of today's column is that we share his confidence. Having inflated so many bubbles – including the monster in private debt that has just blown up – the Fed chief should have little trouble inflating another one in public debt.
History will record that the Bubble Epoch began soon after the Plaza Accords in 1985. The immediate problem confronting finance ministers and central bankers at the Plaza Hotel in New York was what to do about the dollar. After having fallen in the late 1970s, it went up so much in the early 1980s that there seemed no stopping it. The strong dollar had advantages. American tourists visiting London in the early 1980s could leave their calculators at home. A dollar was a pound. A pound was a dollar.
But it was also a threat to America's commercial interests. Japanese imports, in particular, were undermining America's competitive position. So the assembled economists came up with a solution. It was decided that the yen should be revalued, upwards, so as to tilt the playing field a little more to the yankees' advantage. With a higher yen and a lower dollar, products from Japan would have to roll uphill if they were to reach American markets.
Since Richard Nixon had closed the gold window at the US Treasury in 1971, the dollar, not gold, was the bedrock of the new financial system. But the dollar was hardly granite. It was more like gas. Foreign nations bought dollars from their local merchants and exporters, and paid for them with their own currencies. The more greenbacks America emitted, the more money of all shades and colours expanded all over the planet. If central banks failed to keep up with rising supplies of dollars, their local currencies would rise against the greenback, hurting sales to everyone's favorite customer, the US. The banks also used dollars as reserves; as their capital increased, so did their lending. The system was absurd; but it wasn't unpopular. The more Americans spent, the more money foreigners had available to lend them.
Readers should be grateful; if this column were not so short, we would give you more of the details. But there is no need. The facts are not in dispute. The Plaza Accords were followed by the first major bubble of the bubble era – in Japan. The Nikkei Dow rose from 12,000 in 1985 to over 39,000 in 1990. Property prices in Tokyo soared.
The Japanese bubble found its pin in January 1990. It brought about a bust that has lasted longer than marriages and refrigerators. The Bubble Epoch was only beginning. A few years later came bubbles in Asia, Russia, and an oft-rehearsed one in Long-Term Capital Management. LTCM was the blow-up not heard around the world. Investors should have listened more carefully. The fund had two Nobel prize winners on its payroll. Their theories of risk management and mark-to-model pricing were clearly wrong. Pity no one noticed.
Instead, the authorities learned exactly the wrong lessons. When one bubble blew up... the Feds pumped in more hot air – inflating a new bubble somewhere else. When the dotcom bubble exploded, they pumped overtime. Pretty soon, they had inflated huge bubbles – in emerging markets, housing, consumer credit, the financial industry, commodities, food, and even art. Private debt – used to fund the asset bubbles – was the biggest bubble of all. And now, with all those bubbles flattening, along comes another one. A bubble in public debt.
It's inflation they want. And inflation they shall have. Of course, Mr. Bernanke is keen to avoid the "hyper" modifier. "Just a little bit" would be plenty, he says to himself. He aims for 2%... maybe 5%. And if inflation rises to 10%... 20%... or more, he won't be the first central banker to miss the mark.
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Bill Bonner
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