As I write this, Spain just ran out of money. Presumably the European central bank is going to print up a whole lot of fresh money and bail them out, if it has not done so already. If they are not swiftly bailed out, there will be a run on the Spanish banks, and the Spanish deficit will be instafixed as the government loses the ability to pay most people.
The underlying crisis is, of course, that the welfare state is broke. Greece is more broke than Spain, Spain more broke than Germany, Germany more broke than the US, but all the major governments are in a very similar hole.
So can we print our way out the crisis? So far, printing more money has been highly successful, but printing fresh money in such huge amounts is giving everyone an uneasy feeling. Will it work forever? Can it work forever?
Printing more money will eventually lead to inflation, other things being equal, but of course, other things are not equal. We are seeing deflation, not inflation.
The value of fiat money is speculative. It is valuable because people think it is valuable. Properly managed, fiat money is bubble that never bursts. Improperly managed, it bursts, and people start using gold, whiskey, ammo, and dried beans. With more and more fiat money being issued, and the value remaining high, we are seeing bubble behavior.
Hyperinflations start off in series of abrupt bursts. People notice that not only are prices rising, but that goods are getting short. There is a mad rush to unload money and load up on goods. For a little while, money becomes unspendable. After a while, normality returns, but with goods at much higher prices. Prices remain fairly stable for while, the government continues to issue lots of money, and then there is another burst. After this happens several times, inflation starts to become continuous and extremely rapid, and people stop using the fiat money.
So the first hyperinflationary burst, if it happens, which I rather think it will, will rather sudden and shocking. The warning will not be high inflation, but high inflation with shelves emptying. If the governments then start balancing their budgets by laying off civil servants, and cutting civil servant pensions, then we will return to stability – at a substantially higher price level. If, on the other hand, deficits continue, another burst will come soon after the first.
The threat of inflation is receding:
http://www.shadowstats.com/charts/monetary-base-money-supply
True – the threat of inflation this year, or next year, or the year after is receding – possibly because money is fleeing from Europe to the US. But the US is only marginally less broke than Europe.
This was written almost 10 years ago. Funny how the general trend to the left now makes this look dated:
“If the governments then start balancing their budgets by laying off civil servants, and cutting civil servant pensions, then we will return to stability”
In Germany, as probably in most of western Europe (don’t know about the US), most government money isn’t spent on civil servants or their pensions. Instead it is spent on social services, especially for imported barbarians.
Well, Germany actually did do something like what Jim proposed. Their budget went from a deficit of 4.4% of GDP in 2010, to breakeven in 2011-2013, and has been in significant surplus since, with a couple of deficit years lately, but overall having a healthy balance sheet.
Germans still remember hyperinflation, and still desire to be the economic hegemon of Europe — they’ll take whatever mercantilist measures necessary to make that happen.
It’s worth noting that they currently have a record surplus of 13.5 billion euros, but asylum seekers are directly costing the government 23 billion euros. Imagine the records they could be setting without that lead weight around their neck.