I’ve been in South America this week, speaking nine times in five days, interspersed with lots of meetings. The conversation kept coming back to the prospects for the dollar, but I was just as interested in talking with money managers and business people who had experienced the hyperinflation of Argentina and Brazil. How could such a thing happen? As it turned out, I was reading a rather remarkable book that addressed that question. There are those who believe that the United States is headed for hyperinflation because of our large and growing government fiscal deficit and massive future liabilities (as much as $56 trillion) for Medicare and Social Security.

This week, we’ll look at the Argentinian experience and ask ourselves whether hyperinflation can happen here.

The Ascent of Money

I’ll be quoting from Niall Ferguson’s recent book, The Ascent of Money. I cannot recommend this book too highly. And if there was one book I could require every member of the Congress to read, it would be this one. As I read it, I’m struck again and again by how fragile and yet resilient our economic systems are: fragile in the sense that governmental policy mistakes, no matter how well-intentioned, can destroy the wealth of a nation; resilient in that it doesn’t happen more often.

As I’ve been writing, the United States in particular and the developed world in general, are faced with a series of very unpleasant, if not downright bad choices. The time for good choices was 10 years ago. Now we face the prospect of painful decisions, no matter what we do. It’s not a matter of pain or no pain, of somehow avoiding the consequences of our bad decisions. It’s simply deciding how much pain we’ll take and when, or allowing the pain to build up to a climactic event. Today we look at what I think would be the worst choice of all.

Catching Argentinean Disease

At the beginning of the twentieth century, Argentina was the seventh richest nation on earth. It’s very name means “silver.” “As rich as an Argentine” was a byword. Even after falling from the heights through a series of bad decisions, the country was still so wealthy that in 1946, when new president Juan Peron first visited the central bank, he could remark that “There was so much gold you could barely walk through the corridors.”

Argentina had actually defaulted on its debt in the late nineteenth century -- not once, but twice! But still they managed to avoid destroying the currency and devastating the country. But in 1989, after years of massive budget deficits that were financed with borrowing from abroad and Argentinean citizens, the country was left with so much debt (and no one was willing to lend it any more money), that the leaders felt compelled to resort to the printing press.