The Art of Hyperinflation
One the most remarkable things to me is how the American people have been sold on accepting, even preferring, inflation over deflation. It is truly amazing that government and central banking bureaucrats could successfully instill the belief that lower prices for assets are bad. The reality is that lower prices are only bad for artificially-constructed economies.
Deflation is necessary to restore market and economic stability. It is not without pain. But inflation, even mild inflation, is like an intoxicant that slowly destroys the body over time even as its narcotic properties mask the pain. By comparison, hyperinflation is ruinous. How ruinous? Consider this passage from Adam Fergusson's book, "When Money Dies: The nightmare of the Weimar collapse":
"In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom."
Fegusson's book is a stark reminder that arguments over inflation and hyperinflation are not merely academic. I was reminded of this recently when I stumbled across a Flickr page featuring a large collection of German Emergency Currency notes, known as Notgeld, owned by Miguel Oks and his wife. 
Why would someone choose to collect Notgeld? Well, as you can see in the image to the right, the artwork on the emergency currency notes is extraordinary. As Oks, explains, "They made it very pretty on purpose: many people collected the bills, and the debt would never have to be paid." But that's only part of the story as to how this collection came into being.
Oks explains:
"After 800 years of life in the same region, my wife's family left Germany. In 1935 Nazism had become unbearable. They were lucky enough to understand the risk it posed for Jews living in Germany and they left. Until then, her family was part of a comfortable and prosperous middle class, involved in the tobacco business in the city of Karlsruhe.
At the end of the First World War her grandfather started collecting Notgeld produced by many German and Austrian towns and companies to [fight] deflation first and inflation later with the objective of providing stability to workers and residents.
Notgeld was issued by cities, boroughs, even private companies while there was a shortage of official coins and bills. Nobody would pay in coins while their nominal value was less than the value of the metal. And when inflation took off, the state was just unable to print bills fast enough.
Some companies couldn't pay their workers because the Reichsbank just couldn't provide enough bills. So they started to print their own money - they even asked the Reichsbank beforehand. As long as the Notgeld was accepted, no real harm was done and it just was a certificate of debt. Often it was even a more stable currency than real money, as sometimes the denomination was a certain amount of gold, dollars, corn, meat, etc."
The currency notes were not legal tender, mind you. The only people who dealt in it were people who wanted to, but it was very stable and debt free. To keep it flowing, the notes were sometimes issued with stipulations that they would lose 2% to 3% of their value each month. That kept people from hoarding it. The effect was that the notes created a process of orderly rationing of staples.
But there is also something else at work. When you view the slideshow below, note the imagery used, the artistic vision displayed and the craftsmanship on the notes. According to Oks, the notes were printed on all kinds of materials; leather, fabric, porcelain, silk, even tin foil. As well, many of the notes were, in fact, illustrated by artists that would later gain wider audiences for their more traditional works.
The notes provide a unique window into how people responded aesthetically to a horrific economic collapse. When viewing the notes, however, there is also the specter of the National Socialist movement that found its roots during that 1914-1923 decade of economic despair.
Oks explains his interest in the notes this way:
"At a personal level, my interest in these notes lies in the fact that everyone of these pieces of paper carries the seed of the development of twentieth century artistic and political movements. These artistic and ideological movements still influence our thinking and inform our consciousness, our taste and every aspect of our lives. I cannot help but shiver at the emergence of National Socialism palpable in the art of many of these notes."
The slideshow below has just 10 of the more than 4,000 Notgeld in Oks' collection. Oks' images and text accompany the 10 shown in the slideshow.
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Interesting that he states that a kilo of potatoes was worth more than the family silver, which doesn't jibe with the expectation that precious metals are a hedge against hyperinflation. Other parts of the book do imply that gold/silver did remain valuable.
I guess when things get so bad that food is in short supply, which it was in the cities, all bets are off.
Vinz Klortho
I also couldnt agree more Professor about deflation vs. inflation. Deflation IS HEALTHY AND ALWAYS IN NEED. Who expects the market to go up non-stop forever?? Or a pound of potatoes? Green Beans?? Bernie Madoff's clients...that is who.
Losing more than 2% / month this year is a lot more than toilet paper.
May I suggest a new President's pic for the paper?
"The reality is that lower prices are only bad for artificially-constructed economies...."
and
"The currency notes were not legal tender, mind you. The only people who dealt in it were people who wanted to, but it was very stable and debt free...."
and of course the incredible artwork on exchanges of value people were willing to put their faith into, "stabe and debt free"
Here in the progressive northeast, there have been 1 or 2 attempts at a local currency to keep dollars floating locally. It's well intentioned, but in there's that voice in the back of my head that says "you know, local currencies aren't always a *good* thing".
And as someone closer to their youth (at the moment) than their old age: Endless inflation is only good for those who already have assets, ie the status quo. Inflation ultimately robs everyone - first and foremost those in the phase of building assets or who lack them althogether.
Quick e.g. I take out a 0 coupon loan of $1,000 at 5% for one year during a period of 7% inflation. I owe the bank $1,050 at the end of the term, but the bank would need $1,070 at the end just to replace the principal of the loan. Thus the lender feels an effective loss of $120=70+50 from what they planned on having when they wrote the note to gain $50. The borrower sells off $1,050 in product to pay the loan but due to inflation the product sold was only selling for about $981 at the start of the loan, thus the borrower keeps product worth $69 old value or about $74 new value for taking the loan that should have been an expense of $50.
Banks will adjust for inflation they can see coming, and our economic system is always struggling for more to oneself, and interest rates contribute to the ever spiraling up inflation.
So it follows that if you deposit money in a bank or a bond during times of inflation and you don't specifically adjust up your demands based on that, you are getting screwed; nobody negotiates for a higher interest rate based on inflation so they are all screwed. Banks regularly pay less to depositors in interest than the rate of inflation. If you borrow, the bank will price so as to not suffer the same screw job as is given to the depositor.
During deflation the reverse is true, but...
Imagine the painted-lady-ish banks trying to tell depositors that they have fleeced for dozens of years that they now need to charge a fee to depositors for the storage of their money? HA! Not a chance, so the banks begin to be the loser and the depositor "small player" starts to win a little.
The fastest way to put money in the hands of the poor to middle class is by deflation. In 2007 I was discussing this with a small hedge fund manager who has a social conscience for good. Thank you God for deflation.
Remember, the only person who benefits from deflation is someone in currency (or that which is fixed to currency, like Treasury bills/notes, and to a lesser extent riskier assets like Munis and Corporate bonds)... and how many people is that today? Very few people keep cash or the equivalent these days. Most are invested in stock or bond funds, gold/hard assets or real estate (their house). Deflation won't help "savers", only savers who are prudent enough to keep their money in cash.
Judging the two merely on a range & domain basis, one would pose without the need for a rigorous proof that the worst possible deflation is prices are all at zero. Though it's in the range of possibilities, it can't happen because people would just keep their products, or stop producing. However the example of Germany's hyperinflation preceding WWII brought surprisingly high prices. I have heard stories of people using wheelbarrows to move cash to market for purchases. Theoretically their is no upper bound for inflation, but their is a real zero for deflation.
If I had to choose which devil to let loose on the world, it would be deflation for sure.
