If you had asked your editor in 2009 what the biggest threat from central bank money printing is, our answer would have been clear: hyperinflation.
In fact, you didn’t need to ask, we told you anyway.
We have too much pride to try this experiment for ourselves, but we’re certain if you search the Money Morning website for ‘hyperinflation’, you’ll find a bunch of essays warning about the threat of the aforementioned type of inflation.
But, as you are no doubt aware, we were wrong. We were and continue to be extremely wrong.
There hasn’t been even a peep of hyperinflation — anywhere.
Not in the US, where the Federal Reserve has printed hundreds of billions of dollars in fresh money.
Not in the UK, where the Bank of England has undertaken one of the biggest money printing programs in world history.
Not in the European Union, where one country after another has seemed to be in imminent risk of financial collapse.
And not in Japan, where the Bank of Japan openly reveals its dastardly plans to keep increasing the money supply.
How is this possible?
Doesn’t it make sense that if a central bank increases the money supply in such quick fashion, it must surely lead to an increase in prices?
Plus, you would think that if the central bank more than doubles the money supply, in short order, prices would skyrocket.
That, we admit, is what we thought. The reality has been different.
You can see the increase in the US M1 money supply in the chart below:
[Click to enlarge]
From the late 1950s through to today, US money supply has increased 2,217%. Nearly two-thirds of that increase has come in the past nine years, as the M1 money supply has increased 136%.
We are sure there are 101,000 academics who could tell you why the world hasn’t seen hyperinflation, despite the huge increase in money supply.
But whatever their answer, our answer is no doubt simpler.
The absence of hyperinflation is due to one thing: the lack of a viable competing currency.
The US, Britain, Japan, and the Eurozone each have a single, commonly used currency: dollars, pounds, yen, and euros.
Each, respectively, is the sole legal tender in each country. Aside from at an airport or duty free store, the only way to pay for goods or services is with the national legal tender.
That’s why governments impose legal tender laws. It ensures they retain control over what money consumers and businesses can pay or receive.
Without a legal tender law, pesky consumers and businesses would choose to pay with or accept whichever form of money was best for them.
To the horror of the state, that could mean consumers and businesses would avoid their home country’s currency, and choose an alternative instead.
Why would they do that? Well, perhaps they would consider it if the government or central bank attempted to devalue the currency by printing more. Printing more currency should, logically, devalue the money that’s already in existence.
If people began avoiding the national currency in order to own others, the value would fall. And the more it fell, the less desirable it would be to own.
It would be, a vicious downward spiral.
But for the most part, we don’t have this. Certainly not in developed Western nations. And that’s why you haven’t seen hyperinflation in the US, Britain, Japan, or Europe.
As we began to look into famous historical instances of hyperinflation, it became clear that the presence of an alternative form of money was the key to hyperinflation.
That’s true of hyperinflation during the American Civil War.
It’s true of hyperinflation during Weimar Germany.
It’s true of hyperinflation in Zimbabwe.
These all experienced hyperinflation due to alternative viable currencies being available, while the government tried to print its way out of trouble.
The problem is, once an alternative currency emerges, the more the central bank prints, the worse it gets.
But, as I say, we haven’t had that in the West, over the past 10 years. Could that be about to change? A development in Canada could be the catalyst…
A different confiscation
The Financial Times reports:
‘Canada is exploring the creation of a digital version of its currency as central banks examine whether modern technology can create a new medium of exchange. ‘The Bank of Canada, the country’s central bank, revealed in a private presentation in Calgary on Wednesday that it was working with the country’s biggest banks to develop an electronic version of the Canadian dollar.’
Will this be the viable alternative currency, which will result in hyperinflation?
What a question to ask ourselves. Especially to someone who doesn’t know the answer.
Be clear. This isn’t about holding savings electronically in a bank account. That already exists.
This is about creating a separate and new currency. A currency which, according to the FT, would involve:
‘[Issuing], transferring and settling central bank assets on a distributed ledger via a token named CAD-Coin. It is being carried out in conjunction with several of Canada’s biggest banks, including Royal Bank of Canada, CIBC and TD Bank, as well as Payments Canada. It is using intellectual property developed by R3, a New York consortium of more than 50 of the world’s biggest banks.’
To the average fellow in the street, this may appear harmless. But don’t allow the geeky nature of the proposal to fool you.
The problem that central banks and governments have now is that when they create new money from thin air, its value is the same as the money already in existence.
One dollar is one dollar.
But if the government and central bank can create a new currency…an electronic currency…and a currency which the government and central bank could tightly control…it would open new opportunities.
Especially if that currency is for the sole use of the central bank, government, and retail banks.
For example, a new currency, in order to have any value, must be convertible into something else. One of the things it must convert into is…that’s right…the existing currency, which is currently widely used by everyone.
That would mean the government and central bank would have to create an ‘exchange rate’ between the two currencies. No doubt, for political expediency, the exchange rate would be at par. One existing Canadian dollar would be worth one CAD-Coin.
But is it likely things would stay that way? That, my friend, is an easier question to answer…even for your dim-witted editor.
History tells us that no, it wouldn’t stay that way. Give someone the power to influence the price and value of money, and you can bet your most bottomest dollar that they will exercise that power.
Look no further than the hero of the progressive movement, US president, Franklin Delano Roosevelt. The confiscation of gold in 1933 wasn’t about confiscating gold, it was about being able to revalue (sorry, devalue) the US dollar relative to the price of gold.
Once the government had confiscated privately held gold and exchanged it for paper dollars, the government then devalued those paper dollars.
Nice doing business with you, Uncle Sam!
But that was rigmarole. It involved an Executive Order, print newspaper ads, and no doubt radio ads too telling folks to surrender their private gold holdings.
But what if the government could just flick a switch? What if the government decided it needed to print more money but, in doing so, it needed the new money to be more valuable than that already in circulation?
Easy. Just increase the value of the CAD-Coin relative to the Canadian dollar. No longer is the exchange rate 1:1. Now, one CAD-Coin is worth 1.1 Canadian dollars.
It’s a cunning plan. But will it lead to hyperinflation? Not necessarily. The confiscation of gold in 1933 didn’t lead to hyperinflation.
But with alternative electronic currencies such as BitCoin gaining more acceptance, perhaps by the time the Canadian central banks has fully developed its new money, the entrepreneurs of the world will already be many steps ahead.
In which case, who would want the old Canadian dollars? They may not be able to give them away…even if dropped from a helicopter.
That, we pose, could be the catalyst for a descent into hyperinflation.
As always, we shall watch and consider it with interest.
Publisher, Money Morning
Editor’s Note: This article was originally published in Port Phillip Insider.
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