Hyperinflation, national bankruptcy, dollar crash and other exaggerations
Earlier today I wrote a post featuring comments by Marc Faber as I like to do from time to time. In this particular case Dr. Faber was waxing prosaically about an eventual bankruptcy of the U.S. government. His money quote was:
“Next station is when the U.S. government goes bust.”
I love this guy. Quite frankly, the man is a quote machine. He makes a lot of outrageous statements that get him noticed. Here are a few that I have featured in the past:
- Oct 2009 – “Monetary policy in the United States will stay expansionary”
- Sep 2009 – “The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society.”
- May 2009 – “I am 100% sure that the U.S. will go into hyperinflation”
- Mar 2009 – “The feds poured the gasoline and lit the match. Now they’ve joined the fire department”
- Nov 2008 – “I advise every American to hold his gold outside of the United States”
- Mar 2009 – “Don’t underestimate the power of printing money.”
The last one is my all-time favorite. And there are many more available on this site and elsewhere. Dr. Doom is very entertaining indeed – which is why I quote him so often. But, is he right?
That’s a good question – one I will take up indirectly by introducing the latest piece by Martin Wolf, another author I have featured here from time to time. You may have seen me tweet this earlier today. I had intended to add it to the links for tomorrow, but Niels Jensen, who I also feature here often, convinced me to write it up as an ‘antidote’ to Faber.
Here’s how Wolf begins his article:
It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.
This is exactly what the Chinese are doing. They are preparing themselves for a non-dollar future. This is why the Chinese are buying gold. This is why the Chinese are settling trade in Yuan. And this also why the Chinese are getting a bunch of other countries onside. But they are not looking for a dollar crash as I indicated last week.
Then, there is the part about Dollar weakness being a sign of inflation. Here’s what Wolf has to say about this idea:
The dollar’s correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global “imbalances” that helped cause the crisis. I agree with a forthcoming article by Fred Bergsten of the Peterson Institute for International Economics that “huge inflows of foreign capital to the US facilitated the over-leveraging and underpricing of risk”.* Even those who are sceptical of this agree that the US needs export-led growth.
I hope this argument sounds familiar because it is one I made when I asked is the Fed just jawboning? The U.S. wants – it needs a lower dollar to avoid deflation. Quantitative easing is not solving the deflation question. The U.S. government wants a strong dollar? Well, policymakers say one thing and wish for another. The U.S. insistence on focusing on global imbalances at the G-20 should tell you what policy makers really want. This is why the dollar is falling.
The problem of course is that the dollar’s recent rout is not necessarily helping the U.S. because the dollar is overvalued vis-a-vis a host of pegged currencies. And while those currencies are under pressure to drop the peg, they are resisting because they do not want to move toward a more re-balanced global growth paradigm unless forced to do so. Unless these countries (read China) do something on the currency front, expect more of this, this and this – protectionism.
Then, the question arises, if everyone hates the dollar, what are they moving to? Wolf says:
Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets – probably a generation away – the euro is the dollar’s only serious competitor. At present, 65 per cent of the world’s reserves are in dollars and 25 per cent in euros. Yes, there could be some shift. But it is likely to be slow. The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro’s fate is less certain.
This view may be too complacent. The danger of a collapse of the dollar is small and of its replacement by another currency still smaller. But a global monetary system that rests on the currency of a single country is problematic, for both issuer and users. The risks are also growing, particularly since the emergence of “Bretton Woods II” – the practice of managing exchange rates against the dollar.
I liken this argument to George Soros’ comments on dollar weakness: "The dollar is a very weak currency except all the others." Right now, there is no alternative to the dollar. Some people are fleeing U.S. assets if they can. But the alternatives are limited and this limits how far the dollar will fall. And this is unfortunate because the monetary system now in place is in need of change. Without it, we are likely to see nationalistic policy responses to economic weakness, which will induce conflict.
I arrive, by a somewhat different route, at the same conclusion as Mr Bergsten: the global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar’s role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.
Apropos alternative monetary systems, we might start with Paul Davidson’s ideas, which I first highlighted here in November. So there is no hyperinflation, no U.S. national bankruptcy, and no dollar crash coming. But, the financial crisis demonstrates we are living on borrowed time and need a new monetary system. The time is now.
The rumours of the dollar’s death are much exaggerated – Martin Wolf
“Right now, there is no alternative to the dollar.”
Hey Edward, gotta disagree with you here. It may take a while to complete, but the dollar appears to be on its way out as reserve currency.
A study of all hyperinflation incidents of the last 30 years shows that the tipping point occurs when a government’s deficits reach 40% of its expenditures. That’s the US’s projected deficit in 2009. Writeup here:
It sounds more like you agree because you admit “it may take a while.” That is exactly my point.
Thank you for this balanced post. Many salient points.
As for the hyper-inflation argument, it is sad that Mar Faber, being as well read on economic and financial history, clearly hasn’t read or understood Bernholz’s book on hyper-inflation and the structural triggers the pre-date any such events (‘Monetary Regimes and Inflation: History, Economic and Political Relationships’).
I really recommend it as a reading. Eventually it’s about credibility, but the steps required to be taken to the loss of credibility are what matter.
USA is not there yet objectively speaking, although it is taking some calculated steps towards that direction and the markets are keenly watching.
As for the money management firm newsletter that cherry-picked Bernholz’s analysis recently, well they clearly have not read the whole book nor studied the fiscal history of several nations.
Certainly more than 30 years ago, but the US had a deficit that was 68% of spending in 1864, 73% of spending in 1865, 40% in 1935, 43% in 1936 and 50% in 1945. Of course, mostly depression and war years – but we are in two wars now and probably a depression. I don’t think there were hyperinflation periods in the US back then.
The countries we are talking about include Argentina, Brazil, Bolivia, Angola, Eastern European countries after communism fell. In 1983, inflation hit close to 200% in Israel (don’t know if that fits the definition of hyperinflation).
There were a lot of reasons why those currencies inflated – I doubt it was due to budget deficits as a percentage of government spending, but it sounds good.
Of course there is an alternative to the Dlr…It is called a basket of everything non-dollar (including gold and natural resources).
The Nash equilibrium (it is in nobody’s interest the dollar goes down, so we we wont sell the dlr, except for the us) has been destabilized with the slow decline of the dlr. If this continues, first out (small asian central banks?), before a dlr crisis, is best off. This trading thinking, not academic/economist thinking.
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