Be Very Afraid
By Harris Sherline
January 12, 2009

Unless our political leaders wake up and change course, we are headed for hyperinflation. We're not there yet, but I believe we are on the cusp, and when it happens, we will no longer recognize America as we know it.

The cause of this calamity was launched many years ago and has been continued by successive administrations, adopting policies of deficit spending.

Wikipedia defines hyperinflation as "...inflation that is 'out of control', a condition in which prices increase rapidly as a currency loses its value...A vicious cycle is created in which more and more inflation is created with each iteration of the cycle...(I)t becomes visible when there is an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss. (Emphasis added).

Hyperinflation dates back to the Roman Empire - and is graphically illustrated by the situation in Argentina from 1969 to 1992, when their currency reached the point where one pre-1969 peso equaled ten trillion (twelve zeros) new pesos. Savings and investments that were not inflation adjusted and continued to pay a fixed return, such as bonds, quickly became worthless.

When Argentineans received their pay checks, they immediately tried to convert their pesos to commodities or other assets that would hold their value as the rate of inflation continued to escalate. Wealthy citizens tried to deposit money in American banks or they bought stock in American companies. The less wealthy attempted to hold U.S. $100 bills or bought houses or gold or commodities, such as rice -- anything to get rid of their own currency. They also tried to offset the consequences of unbridled inflation by indexing contracts, which adjusted payments to compensate for the rise in prices over time.

An extreme example of the effects of hyperinflation is seen in Zimbabwe, where in a December 19, 2008, the Christian Science Monitor noted: "Under the ruthless rule of its despotic strongman, Robert Mugabe, its economy is near collapse and its people live in fear, as the regime cracks down on political opponents. Thousands have died of malnutrition and starvation... Mismanagement of the economy has produced inflation of an incredible 231 million percent, a figure undoubtedly outdated even as this column is written. The ordinary staples of existence are beyond reach of most citizens." (Emphasis added)

The bottom line is that a nation's currency becomes worthless during runaway inflation. Productivity decreases and capital takes flight, along with other dire consequences, such as the government refusing to redeem its outstanding bonds.

After the First World War, hyperinflation crippled the German economy and visited terrible personal hardships on the nation's citizens. James Turk has observed: "The newly formed German government...kept pumping up the money supply. The process started relatively slowly, but quickly the pace of money creation accelerated...All the wealth saved in Reichsmarks was eventually wiped out."

A May 14th AP article in the Washington Post reported: "Nearly seven in 10 Americans are worried about maintaining their standard of living, as concern has spiked higher in just the past five months, according to a new Washington Post-ABC News poll. Soaring consumer prices are a major challenge, with many people struggling under the weight of the rising costs of fuel, food and health care...Overall, 68 percent of people surveyed in the new Post-ABC poll said they were concerned about their ability to keep up their lifestyles, a jump of 17 percentage points since December..."

The scene is being set for hyperinflation, with panic efforts to "stimulate" the economy and "save" financial institutions and industries that are considered too big or too important to fail. Obama's plans to spend upwards of another trillion dollars on a second "stimulus package" and as much as an additional trillion dollars for new programs (as yet undefined) will soon cause inflation to begin anew. It's difficult to predict exactly when hyperinflation is likely to occur, but unless we stop creating fiat money and borrowing without limit, it's sure to happen.

If and when the Chinese, the Arabs and others decide that it's no longer safe to hold their wealth in American dollars and stop buying U.S. bonds, there will be a sudden drop in the value of our currency with a corresponding increase in inflation.

The American public seems to instinctively understand that what's going on is wrong, but the economically ignorant, bone-headed politicians who are in charge simply don't get it.

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NOTE: Read more of Harris Sherline's commentaries on his blog at "opinionfest.com."

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Note -- The opinions expressed in this column are those of the author and do not necessarily reflect the opinions, views, and/or philosophy of GOPUSA.