Serial currency destroyer Argentina is hoping to break its now 30% annual rate of inflation by mandating a two month freeze on the price of supermarket products. The Commerce Ministry has gone so far as to set up a hotline so that consumers can join the fight by reporting any illegal price increases. Unfortunately this will not work, as one has nothing to do with the other. Price controls are the classic tactic used by economically illiterate politicians who seek to blame others for the effects of their profligacy. Store operators pay the price through lost earnings. Consumers suffer from the inevitable shortages that result when it is no longer profitable to restock the shelves.
In the past 35 years, Argentina has managed not one, but two hyperinflationary episodes. Price inflation has gotten so bad in Argentina that it has now surpassed Venezuela as the worst in Latin America. All the while, government numbers report the official CPI at only 10%, a number so farcical that the IMF has formally reprimanded the government for releasing inaccurate economic data.
By definition, inflation is an increase in the supply of money and credit. Rising prices are merely a symptom of this devaluation. With this in mind, the real question is: how does Ben Bernanke stack up against a world class money printer? Let’s take a look.
The M0 money supply is the measure liquid assets held by a central bank and the amount of physical currency in circulation. This is the number that is directly impacted by Mr. Bernanke’s Quantitative Easing. Since the beginning of 2008, Argentina’s M0 money supply has increased 303% while the United States is up 237%. Clearly, Helicopter Ben is up to the challenge.
And while the US has followed in Argentina’s footsteps of under reporting the official CPI, it’s still nowhere near 30%. Why not? The broader M3 money supply numbers, which include fractional reserve banking credit, show the difference. For Argentina the M3 numbers are up 173% since the beginning of 2008 while the M3 money supply has only increased 21% in the US. So even though Mr. Bernanke has done his part, the banks have not followed through with the creation of new credit… yet. This disconnect between the M0 and M3 numbers will not last forever, just as our creditors around the world will not continue to warehouse excess dollars forever. There will come a day of economic reckoning when Americans too will have to deal with 30% CPI numbers, price controls and product shortages.
The second to last sentence of this article is what Americans should focus on the most: “This disconnect between the M0 and M3 numbers will not last forever, just as our creditors around the world will not continue to warehouse excess dollars forever.”
Mere inflation of the currency by itself does nothing for the economy: the real question is, how much of that printed money actually circulates into the financial system? For the U.S., we are a country that is addicted to easy credit and fast cash, as confirmed by our high rate of velocity of money. We have been able to get away with running the printing press partly because other nations have been willingly stockpiling our Treasuries.
However, there will come a time when other nations (our creditors) have had enough, leaving the Fed with two choices: take the deflationary pain now by raising interest rates, or continue the course, which would lead to a dumping of foreign-held Treasuries and a hyperinflationary destruction of the dollar (since no one wants to buy them anymore, which would lead to infinite supply but no demand).
4 possible ways out of this multi-multi-trillion debt black hole:
1) Taxation: It’s simply impossible to pay off our present and future debt by taxation.
2) Reduction of spending. The Dems will never allow it. The takers are in the majority, and it ain’t gonna happen.
3) We’ll “grow our way out of it”. Nope. the developing countries are where the big action is.
4) Inflate our way out of it. Hyperinflation. This will confiscate the wealth of the “haves”. What do YOU think the professional politicians will do?
History shows that governments rarely repay debt in kind, meaning that they rarely repay value for value. Typically, governments either default (South Americans countries have a horrible record on defaulting.) or they debase their currencies to the point that he money “re-paid” is but a fraction of the value of the money borrowed. Because the dollar is the world’s reserve currency, the US will not default. It will continue down the road of debasement via the Fed’s QE programs.