Thursday, January 14, 2010

Sensible Take On The Hyperinflation Question

Over at, Mac Slavo quotes goldbug Howard Katz on an important point about hyperinflation risk. Katz came up with a sensible debunking of the U.S.-as-Zimbabwe comparison beloved by some hardcore goldbugs. He points out that, if the U.S. should enter hyperinflationary collapse, the world economy would be wrecked with it. That makes a quick, Weimar- or Zimbabwe-style collapse almost impossible. The U.S. dollar is too central to the world economy, and therefore too needed for its value to run to near-zero.

Not mentioned by Katz, but part of the point, is that the U.S. authorities know very well that hyperinflation would wreck the U.S. economy and the U.S.' geopolitical standing. The fear and defiance of America in the anti-American circuit would turn into disdain and derision. To put it bluntly, America would become a world laughingstock. World leadership would inevitably pass to the country, or alliance of countries, that restored the global economy; American geopolitical power would be sunk. There's no way that the authorities would permit such an outcome. Even a Great Depression would be preferable from a power standpoint, as the U.S. would recover on its own. Moreover, most every other country would be in the same boat; the relative-power balance would likely not change that much. (If anything, creditor nations suffer more from deflationary collapses than debtor ones. The debt destruction that's part of a depression hurts the debt-owners more then the debt-owers. In the 1930s, the U.K. fared better than the U.S. - and, unlike the 1930s, the U.S. does not have a rising military superpower willing and able to elbow it off the world stage.)

In Katz' eyes, given the predominance of the U.S., the best comparison is to ancient Rome. Hyperinfation did gut the Roman economy, but it took a couple of centuries to do so.

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