Every now and then it helps to dig through the past.

Let's rewind back to 1920s Germany.

Back then the country was stuck in a less-than-ideal economic situation after the suspension of the gold standard and Kaiser Wilhelm II's failure to pass an income tax to help pay for World War I.

So, to deal with the huge debts left over after the Great War, the president of the country's central bank, Rudolf von Havenstein, printed up a ton of money.

But that plan backfired. It led to skyrocketing hyperinflation, economic breakdown, weaker institutions, and a destabilization of German politics.

Reading about hyperinflation and actually understanding the massive numbers involved are two different things. To that end, UBS legend Art Cashin revisited this moment in history in his daily commentary on Tuesday to touch on how mind-blowing these figures really were — and how bad the human brain is at grasping extremely large values.

From his note:

"So, on this day government officials decided to bring figures in line with market realities. They devalued the mark. The new value would be 2 billion marks to a dollar. At the start of World War I the exchange rate had been a mere 4.2 marks to the dollar. In simple terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get one dollar. And thirteen months from this date (late November 1923) you would need 4.2 trillion marks to get one dollar. In ten years the amount of money had increased a trillion fold.

Numbers like billions and trillions tend to numb the mind. They are too large to grasp in any 'real' sense. Thirty years ago an older member of the NYSE (there were some then) gave me a graphic and memorable (at least for me) example. 'Young man,' he said, 'would you like a million dollars?' 'I sure would, sir!', I replied anxiously. 'Then just put aside $500 every week for the next 40 years.' I have never forgotten that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a.....trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp.

Let’s take a different tack. To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic....like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins.

In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid-month it was $100 billion. Then it all collapsed.

Let’s go back to 'marks.' In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nation just 10 years earlier)."

These sorts of numbers are generally difficult to picture: It's pretty hard to imagine walking into a store and forking over 428 billion marks for a loaf of bread.

So, sometimes, in order to get a better sense of how crazy things were, it helps to share a few anecdotes. Here are some, courtesy of The Economist:

"At its height, prices were rising so fast that waiters had to climb on tables to call out new menu prices in restaurants every half hour. Banknotes became sufficiently useless that workers had to bring wheelbarrows with them to work to collect their daily pay, and bundles were given to children to play with, being cheaper than actual toys."

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JOHANNESBURG/HARARE (Reuters) - When President Robert Mugabe scrapped the Zimbabwe dollar in 2009, most of his people thought this meant the end of runaway money-printing and hyperinflation that had rendered the currency worthless. They may have been wrong.

Adoption of the U.S. dollar and South African rand eight years ago brought financial discipline and currency stability to the country; today the old 100,000,000,000,000 Zimbabwe dollar note holds nothing but curiosity value.

Yet behind the scenes the authorities are once again busy creating their own money from nothing, economists and opposition politicians say. This has allowed the government to borrow heavily via treasury bills to pay a huge civil service, on whose loyalty Mugabe has relied during his 37 years in charge.

Last year Zimbabwe launched a surrogate currency, paper 'bond notes' which are designed to ease acute shortages of U.S. and South African cash in the country. This program is backed by a $200 million loan from the African Export Import Bank.

But the central bank is also creating dollar surrogates in the electronic banking system on a far grander scale, and this money lacks the backing of sufficient currency reserves or gold - the prerequisite of any stable unit.

It is these electronic dollars, nicknamed "zollars" by economists, that are raising fears that Zimbabwe might be heading for its second financial collapse in a decade.

"It's a Ponzi scheme, a pyramid scheme," former finance minister Tendai Biti told Reuters. "The implosion is coming. You can't defy economics. You can't defy fundamentals."

Biti held the post in a 2009-2013 unity government that comprised Mugabe's ZANU-PF party and the opposition. It conquered hyperinflation after the rate had reached billions of percent, before ZANU-PF regained sole power four years ago.

An opposition leader, Biti remains a staunch opponent of 93-year-old Mugabe, but some economists share his worries.

"They are creating money without anything to back it up. It's just fiction money," one analyst at a Harare-based asset management firm told Reuters. "The question is how long can they keep doing this before the system collapses?" said the analyst, who asked not to be named for fear of recriminations.

Since dollarization, the central bank has not published currency reserve figures but last month it said local banks had $250 million in offshore accounts, equal to Zimbabwe's import bill for just two weeks.

Zimbabwe can ill afford another crisis. Full of economic promise at independence in 1980, it has never fully recovered from a slump that began in 2000 with the violent seizure of thousands of white-owned farms. Unemployment runs at 80 percent.

Neither Reserve Bank of Zimbabwe Governor John Mangudya nor Finance Minister Patrick Chinamasa responded to Reuters requests for interviews. They also did not respond to emailed questions.

Surrogate currency

Launched in November, the small-denomination bond notes are officially valued at 1:1 to the dollar but cannot be easily exchanged into U.S. currency.

Businesses are charging higher prices when customers pay with the domestic bond notes rather than with dollar bills issued by the U.S. Federal Reserve. This is because the firms often have to buy U.S. currency at a premium on the black market to purchase the imported goods they sell.

"Firms' prices reflect that one U.S. dollar in hard cash is equivalent to $1.30 in bond notes, meaning that the surrogate currency has already lost 30 percent of its value," Chantelle Matthee, an analyst at NKC African Economics in neighboring South Africa, said in a note earlier this month.

Officially inflation scarcely exists. Consumer prices rose 0.06 percent year-on-year in February, the national statistics agency reported.

This data is based on dollars but things are different in the real world of surrogate currency. In Harare, firms selling car parts from South Africa have raised prices 40 percent this year; the costs of imported items such as dishwashers, cheese and breakfast cereal are up as much as 25 percent.

In the banking system, a devaluation also appears underway. Assessing the true value of zollars is difficult but economists have revived a gauge used during the hyperinflation era - the Old Mutual Implied Rate.

This compares share prices of the Old Mutual insurance firm in Harare and in London, where it has its primary listing. Toward the end of last year, around the time the bond note plan was announced, the Harare shares began trading at a sizeable premium.

Old Mutual in Harare closed at $3.51 last week compared with the sterling equivalent of about $2.77 on the London Stock Exchange. So, Zimbabweans need more dollars than people in London to buy the same shares. While a number of factors may be at play, this suggests their currency is worth less, even though its face value is officially at par to the dollar. 

Secret sales

Commercial banks are borrowing zollars created by the Reserve Bank. They are then lending them on to the government in return for treasury bills, IOUs known as T-bills.

Private sales of T-bills to the banks and other institutions such as pension funds have raised much-needed funds for the government - it is running big budget deficits to pay a public sector wage bill that swallowed up 91 percent of 2016 spending.

Last year the government was late in paying civil servants, including the army, for several months in a row. When doctors and teachers started striking to demand $180 million of promised year-end bonuses, it caved in.

Despite a constitutional demand for parliamentary oversight of public debt, no details of the T-bill sales are published, making it hard to know exactly how much debt Harare has racked up on top of the $8.5 billion it owes international creditors.

Bankers are concerned by secrecy surrounding the debt sales the Reserve Bank runs. "We urge the central bank to revisit the auction system of treasury bills... to ensure that there is transparency," Charity Jinya, head of the Bankers Association of Zimbabwe, told a parliamentary finance committee in February.

Estimates of the government's domestic debt, based on official figures, media reports and information from local asset managers, are as high as $5 billion, equal to around 35 percent of Zimbabwe's annual GDP.

Official data point to accelerating borrowing as ZANU-PF gears up for parliamentary and presidential elections in 2018. In the three full years since it regained outright power, the government has run deficits of $200 million, $295 million and $1.4 billion respectively, finance ministry figures show.

That final shortfall, in 2016, was from a deficit initially projected at just $150 million.

Harare has also borrowed to pay for other items, including $1 billion to recapitalize the central bank and clear its debts, and $550 million for ZAMCO, a state-run 'bad bank' set up to handle sour debts from the 2008/09 meltdown.

'Not in control'

Harare's options are limited. Tax revenue is flat due to a weak economy, which grew only an estimated 0.6 percent last year. The government cannot borrow heavily abroad due to arrears it built up with multilateral lenders.

When the T-bills are due - they have maturities from three months upwards - they are simply rolled over with the issuance of longer-dated debt, several asset managers involved said.

Commercial banks' T-bill holdings have jumped from zero in 2013 - the year ZANU-PF regained outright power - to $1.4 billion at the end of last year, according to central bank figures.

However, bankers play down the risks. "At this point there is no doubt in our minds that as any parcel of the Treasury Bill that we are holding matures, we are going to be paid," Never Nyemudzo, chief executive of CBZ, Zimbabwe's biggest bank, told an analysts' briefing last month.

Meanwhile, signs of inflation grow. The basic measure of money supply jumped 40 percent last year, while bank deposits grew from $5.6 billion to $6.5 billion despite the stagnant economy.

"The government is not in control," said University of Zimbabwe economics professor Tony Hawkins. "Events are controlling them and it will be a hard landing when it comes."

(editing by David Stamp)

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LONDON — The South American state of Venezuela is in deep trouble.

The country, which was once hailed by many on the Western left as a shining example of socialism in action, is crumbling, both economically and politically.

The scale of the country's fall can be seen in cold, hard data, some of which is truly shocking.

In 2017, Venezuela's economy is 35% smaller than it was in 2013 in terms of gross domestic product and 40% lower in GDP per capita terms, as noted by Harvard economist Ricardo Hausmann, who was the country's minister of planning in the early 1990s, in a piece for Project Syndicate.

Hausmann reflected on the scale of the contraction in a recent article for Project Syndicate, writing that the shrinking was "a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%."

He continued: "It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993), and Albania (1989-1993)."

Beyond the headline numbers, things are even more stark. Here is Hausmann once again:

"Clearly, a 40% decline in per capita GDP is a very rare event. But several factors make the situation in Venezuela even bleaker. For starters, while Venezuela's GDP contraction (in constant prices) from 2013 to 2017 includes a 17% decline in oil production, it excludes the 55% plunge in oil prices during that period. Oil exports fell by $2,200 per capita from 2012 to 2016, of which $1,500 was due to the decline in oil prices."

You can read Hausmann's full analysis here.

Economically speaking, Venezuela's main problem is that it relies far too heavily on oil exports as a means of generating economic prosperity.

When times were good in the oil markets and oil was worth more than $100 a barrel the country was able to grow rapidly and offer its citizens a great quality of life.

But three years on from the crash in oil prices, the country simply cannot do that anymore, and its citizens are suffering. Venezuela certainly had problems before the oil-price crash, but the downturn accelerated and exacerbated those issues.

Fresh trouble has been sparked in the country this week by an election decried by critics as illegitimate and designed to give the unpopular government of President Nicolas Maduro powers to rewrite the country's constitution and sideline its opposition-led congress.

The US labelled Maduro a dictator and accused him of "seizing absolute power," and it imposed sanctions on the country, potentially compounding the state's economic woes.

At the same time, inflation in the country is still growing uncontrollably, while the country's currency, the bolivar, devalues at an almost unbelievable rate.

While the official rate of exchange between the US dollar and the bolivar is roughly 10 bolivars to the dollar, in reality it is more like 10,000.

A recent analysis by CNN Money showed that at the end of July a dollar was worth 10,389 bolivars, up from about 3,000 at the start of the year and 8,000 just a week before.

Inflation could exceed 1,600% by the end of 2017, according to some estimates, and many restaurants have stopped publishing prices because costs are rocketing so fast.

Restaurants, however, are but a dream for the vast majority of Venezuelans. Associated Press correspondent Hannah Dreier recalled on Wednesday how food shortages were so bad that a bakery near where she lived in Venezuela's capital, Caracas, allowed people to line up outside not to buy bread but to rummage through its bins for scraps.

"People waited for their turn to hunt through black bags of bakery garbage," Dreier wrote. "A young woman found a box of muffin crumbs. A teenage boy focused on finding juice containers and drinking whatever remained."

As The Economist — which ran a special report on the country last week — writes: "Over the past year around three-quarters of Venezuelans have lost weight, averaging 8.7kg per person, because of a scarcity of food."

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CARACAS/CIUDAD GUAYANA, Venezuela (Reuters) - There was no way Jose Ramon Garcia, a food transporter in Venezuela, could afford new tires for his van at $350 each.

Whether he opted to pay in US currency or in the devalued local bolivar currency at the equivalent black-market price, Garcia would have had to save up for years.

Though used to expensive repairs, this one was too much and put him out of business.

“Repairs cost an arm and a leg in Venezuela,” said the now-unemployed 42-year-old Garcia, who has a wife and two children to support in the southern city of Guayana. “There’s no point keeping bolivars.”

For a decade and a half, strict exchange controls have severely limited access to dollars. A black market in hard currency has spread in response, and as once-sky-high oil revenue runs dry, Venezuela’s economy is in free-fall.

The practice adopted by gourmet and design stores in Caracas over the last couple of years to charge in dollars to a select group of expatriates or Venezuelans with access to greenbacks is fast spreading.

Food sellers, dental and medical clinics, and others are starting to charge in dollars or their black market equivalent — putting many basic goods and services out of reach for a large number of Venezuelans.

According to the opposition-led National Assembly, November’s rise in prices topped academics’ traditional benchmark for hyperinflation of more than 50 percent a month — and could end the year at 2,000 percent. The government has not published inflation data for more than a year.

“I can’t think in bolivars anymore, because you have to give a different price every hour,” said Yoselin Aguirre, 27, who makes and sells jewelry in the Paraguana peninsula and has recently pegged prices to the dollar. “To survive, you have to dollarize.”

The socialist government of the late president Hugo Chavez in 2003 brought in the strict controls in order to curb capital flight, as the wealthy sought to move money out of Venezuela after a coup attempt and major oil strike the previous year.

Oil revenue was initially able to bolster artificial exchange rates, though the black market grew and now is becoming unmanageable for the government.

Trim the tree with bolivars

President Nicolas Maduro has maintained his predecessor’s policies on capital controls. Yet, the spread between the strongest official rate, of some 10 bolivars per dollar, and the black market rate, of around 110,000 per dollar, is now huge.

While sellers see a shift to hard currency as necessary, buyers sometimes blame them for speculating.

Rafael Vetencourt, 55, a steel worker in Ciudad Guayana, needed a prostate operation priced at $250. “We don’t earn in dollars. It’s abusive to charge in dollars!” said Vetencourt, who had to decimate his savings to pay for the surgery.

In just one year, Venezuela’s currency has weakened 97.5 per cent against the greenback, meaning $1,000 of local currency purchased then would be worth just $25 now.

Maduro blames black market rate-publishing websites such as DolarToday for inflating the numbers, part of an “economic war” he says is designed by the opposition and Washington to topple him.

On Venezuela’s borders with Brazil and Colombia, the prices of imported oil, eggs and wheat flour vary daily in line with the black market price for bolivars.

In an upscale Caracas market, cheese-filled arepas, the traditional breakfast made with corn flour, increased 65 percent in price in just two weeks, according to tracking by Reuters reporters. In the same period, a kilogram of ham jumped a whopping 171 percent.

The runaway prices have dampened Christmas celebrations, which this season were characterized by shortages of pine trees and toys, as well as meat, chicken and cornmeal for the preparation of typical dishes.

In one grim festive joke, a Christmas tree in Maracaibo, the country’s oil capital and second city, was decorated with virtually worthless low-denomination bolivar bills.

Most Venezuelans, earning just $5 a month at the black market rate, are nowhere near being able to save hard currency.

“How do I do it? I earn in bolivars and have no way to buy foreign currency,” said Cristina Centeno, a 31-year-old teacher who, like many, was seeking remote work online before Christmas in order to bring in some hard currency.

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Since the New Year, Ukraine’s currency – the hryvnia – has collapsed, losing 51 percent of its value against the U.S. dollar.

To put this rout into perspective, consider that the Russian ruble has only lost 8 percent against the greenback during the same period.

Like night follows day, the hryvnia’s meltdown has resulted in a surge of inflation. The last official Ukrainian year-over-year inflation rate is 28.5 percent. This rate was reported for January and is out of date.

That said, the official inflation rate has consistently and massively understated Ukraine’s brutal inflation. At present, Ukraine’s implied annual inflation rate is 272 percent. This is the world’s highest inflation rate, well above Venezuela’s 127 percent rate (see the accompanying chart).

When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. Indeed, the principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.

To calculate the inflation rate in Ukraine, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). At present, the black-market UAH/USD exchange rate sits at 33.78.

Using this figure and black-market exchange rate data that the Johns Hopkins-Cato Institute for Troubled Currencies Project has collected over the past year, I estimate Ukraine’s current annual inflation rate to be 272 percent – and its monthly inflation rate to be 64.5 percent. This rate exceeds the 50 percent per month threshold required to qualify for hyperinflation.

So, if Ukraine sustains its current monthly rate of inflation for several more months, it will enter the record books as the world’s 57th hyperinflation episode.

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It has been over six years since the start of the global financial crisis.

The unconventional expansionary monetary policies that have been pursued in its wake do not seem to have delivered on their objective of a robust global economic recovery.

Yet the fears that such measures would lead to hyperinflation or the collapse of the US dollar have not been realized either.

Why has reality defied expectations?

I discussed these issues with the distinguished economist Nouriel Roubini in a short, nine-minute video interview last month at the 2015 Middle East Investment Conference.

Roubini argues that those who feared hyperinflation from unconventional monetary policies confused cause and effect. Policies like quantitative easing (QE) and zero-interest rates were implemented to prevent deflation and a “double-dip or triple-dip recession,” he said. The “doom-and-gloom” pessimists who anticipated the rise of gold and cryptocurrencies have been proven wrong, he noted. Gold is trading well below its highs and bitcoin was the worst performing currency in 2014, falling by nearly 60%.

Click here to see the Roubini interview »

As for why these measures have failed to create robust economic growth as expected in different parts of the world, Roubini points to the “wrong policy mix,” with too much reliance on monetary expansion and not enough on fiscal stimulus. He thinks that the world’s supply of goods and services is greater than demand. Monetary policy alone can only do so much to boost aggregate demand, and government spending, particularly productive infrastructure outlays, with the obvious exception of China, could have made a difference in spurring a global economic recovery.

If gold and cryptocurrencies have not lived up to the expectations of the “gold bugs,” they haven’t created large-scale externalities either. But might unconventional monetary policy hold some of the blame for rising inequality? When I asked him this question, Roubini responded that increased inequality is caused by a number of factors unrelated to these measures. He points to technological innovation, trade, globalization, and a “winner-take-all superstar effect.” Unconventional monetary policies have probably played a part in rising inequality through asset price inflation, he says.

But things would have been much worse for those on the middle and lower rungs of the economic ladder in the absence of these policies, which may have helped prevent a potential double-dip or triple-dip recession.

In addition to sitting for this interview, Roubini delivered the closing keynote address at the 2015 Middle East Investment Conference. Coverage of that presentation can be found in “Roubini: Robust US Growth, Bumpy Landing for China, and No Grexit.“

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Zimbabwe's central bank announced the demonetization of the Zimbabwe dollar will occur from June 15 until the end of September, according to China's state-run newspaper, Xinhua. 

"The banking public should visit their banks to establish the balances which were in their accounts. We have interacted with the banks and they still have all the information, which we as the Reserve Bank also authenticated," Reserve Bank of Zimbabwe governor John Mangudya said.

The process will expunge Zimbabwean notes from the country's banking system, which now includes a combination of US dollars, South African rands, and Botswana pulas, in an effort to move past the horrific episode of hyperinflation that occurred in 2008. While the official inflation figure during that time was recorded at 231,000,000%, others have suggested the actual inflation rate was greater than 4,000,000,000%.  

Xinhua reports that any bank account holding between zero and 175 quadrillion Zimbabwe dollars will receive a flat $5 payment. Meanwhile, Zimbabweans who hoarded bills at home will receive a rate of 250 trillion to $1 for their 2008-issued notes and 250 to $1 for their 2009-issued notes.

Zimbabwe's economy fell into a hyperinflationary spell under the leadership of dictator Robert Mugabe, who has been the country's President since 1987. Mugabe's economic policy sent the Zimbabwean economy into a tailspin as he implemented price controls and printed endless amounts of money. He was quoted as saying, "Where money for projects has not been found, we will print it."

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There’s an economic battle occurring over whether Greece should leave the Euro or not. Economists on the left tend to say they should leave, bring back their old currency and go their own way. Economists on the right tend to say that Greece should stick it out and hang with the Euro.  I like to think I don’t generally find myself on a “side” and here’s a pretty good example of that.

5 years ago I said Greece should definitely leave the Euro.  My basic reasoning was that full integration is not going to happen and Greece will have to suffer through depressionary deflation in order to allow an internal rebalancing of their economy to occur. That view has turned out to be pretty spot on. Greece has undergone a modern day depression by any standard. And if they’d brought back the Drachma many years ago they could have avoided a lot of the deflation and depression.

This is no longer the situation we’re in. Greece has already undergone a substantial internal rebalancing. They’re one of the only Euro Area countries where wages have actually FALLEN in the last 5 years.  And they’ve fallen quite a bit in relative terms:

Now, the economists on the left say that Greece should leave because their new currency will make them so much more competitive. But I am not so sure that’s the right move at this point. The time to leave was before the depression set in. Not 5 years after it set in.  And the reason why is simple. At this point Greece faces no good options. Staying in the Euro is going to very likely involve low growth and further austerity. But the alternative looks perhaps more frightening at this point. And the alternative is a high inflation and perhaps even a hyperinflationary nightmare. In fact, if there was ever a recipe for hyperinflation then Greece meets all the criteria.

The problem is multifaceted:

• The Greek economy is too dependent on foreign exports.
• The Euro will still be the dominant currency inside of Greece given that it’s largely a services and travel based economy.  They will have, at best, a dual currency system.
• Their tax system is defunct.
• Their current budget promises will not be met via tax receipts.
• Their bonds will not be in high demand in the near-term for obvious reasons.

All of this means that Greece will have to fund its spending by harnessing its central bank. And this means they could be on the verge of a hugely inflationary environment.  They could offset some of this through harsh government policies including austerity and a balanced budget, but the whole point of this charade is that they don’t want more austerity.  There’s a good chance that bringing back their own currency will not only result in austerity (by necessity), but it will also result in sky high inflation.  In essence, they will have won nothing.

This isn’t unfamiliar territory for Greece.  After all, prior to joining the Euro, which brought unprecedented price stability to the Greek economy, they were in a perpetual inflationary tailspin.  Worse, the Greek economy appeared to be growing a bit prior to the Syriza government renewing this crisis. That was largely due to the internal rebalancing that had occurred. This doesn’t mean the prospects for growth were/are strong, but we’re at a point where the Greek government has to choose between a few more years of low or slow growth with the hope of greater Euro integration. OR, they can roll the dice, go their own way and return to what will likely be a disastrous high inflation environment that could leave them worse off than they are today.

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One of the conundrums of monetary policy over the past eight years is the Federal Reserve’s failure to cause inflation. This sounds strange to most. People associate inflation with misguided monetary policy by central banks, especially the Fed.

So-called “money printing” is seen as a certain path to inflation. The Fed has printed almost $4 trillion since 2008. Yet inflation (at least as measured by official statistics) is barely noticeable. With so much money around, where’s the inflation?

This conundrum has several answers. The first is that the Fed has been printing money, but few are lending it or spending it. The banks don’t want to make loans, and consumers don’t want to borrow.

In fact, the private sector on the whole has been deleveraging — selling off assets and paying off debt — even as public debt expands. The speed at which consumers spend money (technically called velocity) has been sinking like a stone.

This divergence between money creation and money use can be seen clearly in the two charts below.

Chart 1 shows the increase in Federal Reserve base money since 1996. From 1996-2008, it increased at a steady pace, exactly as Milton Friedman and other monetarists had recommended since the 1970s.

Beginning in 2008, the money supply “went vertical” with three successive quantitative easing (QE) programs of money printing. These are highlighted on Chart 1 as QE1, QE2 and QE3.

Chart 2 shows declining velocity over the same period. In effect, the money printing from 2008-2015 was cancelled out by the declining velocity over the same period. The result was practically no inflation.

U.S. base money supply (shown in Chart 1) has increased from $800 billion in 2008 to over $4 trillion today. However, the turnover or “velocity” of money (shown in Chart 2) has collapsed over the same period.

Increased money supply alone does not cause inflation. The money must be borrowed and spent. The absence of lending and spending (as shown in declining velocity) is one reason disinflation and deflation have been more prevalent than inflation.

The second reason for the absence of inflation is that the world is confronting powerful deflationary head winds, principally demographics and technology. The rate of increase of global population peaked in 1995. Today populations are in decline in Japan, Russia and Europe. They are also stagnant elsewhere outside of Africa and the Middle East.

Fewer people means less aggregate demand for goods and services. Improved technology and efficiencies from predictive analytics have lowered the cost of everything from inventories to transportation. This combination of less demand and greater efficiency results in lower prices.

The final reason is globalization. The ability of global corporations to locate factories and obtain resources anywhere in the world has expanded the pool of available labor.

Global supply chains and advanced logistics mean that products like smartphones are created with U.S. technology, German screens, Korean semiconductors and Chinese assembly. The phones are then sold from India to Iceland and beyond. Yet many of the workers are paid little for their value-added in these global supply chains.

These deflationary tendencies create a major policy problem for the Fed. Governments need to cause inflation in order to reduce the real value of government debt. Inflation also increases nominal (if not real) incomes. These nominal increases can be taxed.

Persistent deflation will increase the value of debt and decrease tax revenues in ways that can cause governments to go bankrupt. Governments are therefore champions of inflation and rely on central banks to cause it.

In the past eight years, the Fed has tried every trick in the book to cause inflation. They have lowered rates, printed money, engaged in currency wars, used “forward guidance” (promises not to raise rates in the future), implemented “Operation Twist” and used nominal GDP targets. All of these methods have failed.

The Fed then shot itself in the foot by tapering asset purchases, removing forward guidance and threatening to raise rates from 2013-15. These tightening moves made the dollar stronger and increased deflationary forces even as the Fed claimed it wanted more inflation.

This two-year tightening episode is proof (not that any was needed) that the Fed does not understand the dynamic deflationary forces it is now confronting.

My expectation is that the Fed will soon reverse course and return to some form of easing — probably more forward guidance and a cheaper dollar. If I’m wrong and the Fed actually does raise rates, deflation will get worse and a global recession will emerge.

A central bank’s worst nightmare is when they want inflation and can’t get it. The Fed’s tricks have all failed. Is there another rabbit in the hat?

Actually, yes. The Fed can cause massive inflation in 15 minutes. They can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.

The Fed can make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold. They will be a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher.

They will print money when they buy and reduce the money supply when they sell via the banks. This is exactly what the Fed does today in the bond market when they pursue QE. The Fed would simply substitute gold for bonds in their dealings. The Fed would target the gold price rather than interest rates.

Of course, the point of $5,000 gold is not to reward gold investors. The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,000 per ounce to $5,000 per ounce is really an 80% devaluation of the dollar when measured in the quantity of gold that one dollar can buy.

This 80% devaluation of the dollar against gold will cause all other dollar prices to rise also. Oil would be $400 per barrel, gas would be $10.00 per gallon at the pump and so on. There it is — massive inflation in 15 minutes: the time it takes to vote on the new policy.

Don’t think this is possible? It has happened in the U.S. twice in the past 80 years. You may even know some people who lived through both episodes.

The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the dollar price of gold. He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36.

The second time was in the 1970s when President Richard Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.

Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200% increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the dollar was cut in half in those five years.

History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.

History also shows that gold not only goes up in inflation (the 1970s), but it also goes up in deflation (the 1930s). When deflation runs out of control, as it did in the 1930s and may again, the government will raise the price of gold to break the back of deflation. They have to — otherwise, deflation will bankrupt the country.

Do I expect deflation to run out of control soon? Actually, no. Deflation is a strong force now, but I expect that eventually the Fed will get the inflation they want — probably through forward guidance, currency wars and negative interest rates.

When that happens, gold will go up.

Still, if deflation does get the upper hand, gold will also go up if the Fed raises the price of gold to devalue the dollar when all else fails.

This makes gold the ultimate “all weather” asset class. Gold goes up in extreme inflation and extreme deflation. Very few asset classes work well in both states of the world. Since both inflation and deflation are possibilities today, gold belongs in every portfolio as protection against these extremes.

SEE ALSO: A look at how Manhattan real estate fared during the Great Depression

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POITOU, France – Last week, young colleagues at Bonner & Partners HQ in Delray Beach, Florida, put us on the spot.

“What do we stand for as a publishing business?” they asked.

“Who are we? How are we different from anyone else? What do we think that others don’t?”

We are not the only publishers to offer opinions. And not the only ones with alternative points of view.

So, to answer these questions, let’s look first at the range of opinions on offer…

Divided Opinions

First, there is “the authorities must know what they are doing… besides, I have more important things to think about” camp.

This is by far the largest group: hoi polloi. The masses. The lumpenproletariat.

There may be some grumbling and kvetching. But most people count on the feds to manage the economy, foreign policy, the future, and the government.

They expect mistakes from time to time. But they also believe the system can be trusted to produce an acceptable, although perhaps not always ideal, outcome.

And if not, God help them. Because the difference between the outcome if they bothered to think about it and the outcome if they didn’t is the same. They have no ability to influence public policy… and not much room to maneuver in their private lives.

They get salaries, pensions, Social Security. They need jobs, mortgages, student loans, and medical insurance. They have little capital to invest or protect. They depend so heavily on “the system” that they can’t afford to believe there is something deeply wrong with it. They go along. They get along.

At the other end of the idea spectrum, there are the edgy, malcontent, and extremely marginal opinions.

A man, sitting in his double-wide watching TV can come to hold all sorts of wacky views. There is an entire infotainment industry that provides screwball opinions.

You want to believe Obama is a Muslim? You want to believe the Bilderbergers, the Rothschilds, or the Rockefellers run the world? You want to know about GM’s perpetual-motion engine that – if the secret got out – would put the entire auto industry out of business?

Well, that is a market. But it is not ours. Let others fill that demand.

There used to be a tabloid newspaper called Weekly World News. You would see it at the convenience store, right in front of the checkout with enticing headlines such as: “Garden of Eden Found”… “Obama Adds Himself to Mount Rushmore”… or “150-Year-Old Man Finally Graduates from High School.”

Our favorite was a front-page photo of an airplane crashed on the surface of the moon. “WWII Bomber Found on Moon,” was the headline. “Pilot Error, Say Experts.”

Terminal Problem

But it is the far-out world of money, economics, and finance that interests us.

We try to figure it out. We try to understand. We try to see what’s coming before it arrives. And we try to be serious about it.

Apart from the mainstream view – that the authorities have things under control – almost all serious analysts see a terminal problem developing.

The current situation (with zero and even negative interest rates… and debt expanding much faster than GDP) can’t go on.

It had a beginning, in the early 1980s. It must also have an end.

Most of the guesswork is now focused on when and how that end comes.

Recently, one of our dear readers summarized the three major points of view, along with one minor one:

Deflation Camp
Harry Dent is in line with the Austrian Business Cycle Theory: Money printing causes financial bubbles, distorts the economy, and is therefore counterproductive.

Like Bob Prechter (I don’t follow him closely, but his argumentation sounds similar), Dent bets on deflation and depression.

Fighting debt deleveraging and demographics is like putting yourself in front of a tsunami.

In such an environment, the U.S. dollar would gain purchasing power, and gold would underperform significantly. (Harry sees it back to $700 in 2018-19.)

Cash/T-bills/short-term Treasurys are the place to be. Rates will stay low for very long.

Inflation Camp
Jim Rickards’ thesis – “inflate debt away via a massive issuance of SDRs after China has joined the club” – is also very credible.

World currencies are massively diluted via issuance of SDRs, which serve only the powers that be. Rather than a new gold standard, this is the solution to Triffin’s dilemma (more flexibility for the elite).

[Triffin’s dilemma describes the constant need for the global reserve currency issuer – in this case, the U.S. – to supply the world with reserve currency by way of a long-term trade deficit. Eventually, argued Yale economist Robert Triffin, this would lead to a loss of confidence in the reserve currency.]

Citizens are excluded/not allowed to own SDRs. Their purchasing power shrinks. They don’t know who to blame.

The IMF does not consist of elected officials, and the majority of the population doesn’t even know it plays a role in creating inflation. And they can pretend that they have to save the world, too. (Remember the Greek bailout?)

Hyperinflation Camp
Shadow Stats’ John Williams is having a really hard time fighting for his ideas. He is right about the “CPI-CP Lie” and the current true state of the economy. But whoever invests along his ideas is running out of capital to stay in the game.

Peter Schiff and Mike Maloney are on a similar line. The problem with them is that they have a conflict of interest with their businesses. But I have no doubt about their integrity: They do/live what they say.

Deflation to Hyperinflation Camp
I recall an interview with Nassim Taleb on Bloomberg TV in 2009 when he said, “We will go from deflation to hyperinflation without seeing inflation.”

Tokyo to Buenos Aires

Our view is that Taleb will be proved right.

Back in 2009, we predicted “Tokyo… then Buenos Aires” – a Japan-like deflation, followed by Argentine-like hyperinflation.

Most likely, there will be no stop in between for moderate levels of inflation.

Inflation, as economist Milton Friedman observed, is “always and everywhere” a monetary phenomenon. But hyperinflation is a political phenomenon.

It is caused by those same authorities the masses think they can trust. When they are threatened, they will protect themselves by printing money on a scale we haven’t seen since the War Between the States. (Consumer prices in Richmond, Virginia, had risen 6,700% by the end of the war.)

There are times when printing money seems like the best course of action – especially for the people running the printing press. It may not do the common man any good, but it gets the feds out of a jam.

But that is a long story… and one for the future.

We’re still in a Japan-like long, slow slump. And it looks as though we’re going to be there a while longer.

Tomorrow, we’ll look at China – and more reasons why we are in a deflationary trend right now. So stay tuned…

SEE ALSO: Low inflation will continue to be a problem in 2016

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Tech entrepreneur and bitcoin guru Wences Casares saw his family lose their entire wealth three times in Argentina because of hyperinflation, a currency collapse and confiscation.

"[There's] more people in the world who need a currency they can trust than the opposite," Casares told Dan Morehead, the ex-head of macro trading at Tiger Management, in a new interview on RealVision Television, a subscription financial news service.

Those instances are what ultimately led him to the digital cryptocurrency bitcoin.

Casares created Argentina's first internet provider and later sold his online brokerage firm to Banco Santander for $750 million in 2000. He is now a star of the Silicon Valley bitcoin scene, heading Xapo, a company that provides a bitcoin wallet and storage vault.

The real "a-ha" moment for bitcoin happened when he was planning a trip with a group of childhood friends back in Argentina. 

'I was very skeptical'

"We all had to chip in some money. They were all in Argentina except me, I'm here in California. They all got together and gave the cash to one of them. And I was trying to find a way to send money. At the time, PayPal had to stop sending money to Argentina and wire transfers were not working because of the currency control." 

That's when one of his friends suggested using bitcoin.

"I was very skeptical because this particular friend of mine is not particularly tech savvy or financially sophisticated." 

Casares did some research online and arranged a meeting in a Palo Alto cafe with someone he connected with on Craigslist. He gave the man cash and got some bitcoin in return. He immediately sent the bitcoin to his friend in Argentina. 

"By the time I made it back to the office my friend had sold it for pesos in Argentina. I was like, 'Wow that's incredible. It's like magic.'"

Casares compared the power of bitcoin in the developing world to the cellphone.

"I think it's obvious the cellphone had a lot more impact in developing world than the developed world because most phones in the developing world are cellphones. If it weren't for cellphones the developing world would not be communicating so it really changed the lives of people in emerging markets."

That's not to say that cellphones aren't important in the developed world though. Bitcoin will be important there too, Casares said.

"It's easier to see how [bitcoin can be] transformative and it can change the lives of people in emerging markets, but it also has an important role to play in the developed world." 

Watch the teaser below. You can watch the full interview by subscribing to RealVision:

SEE ALSO: Star Silicon Valley entrepreneur: Here's why bitcoin will be bigger than the internet

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The World’s Most Famous Case of Hyperinflation (Part 1)

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect.

Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.

The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.

The Treaty of Versailles

Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.

The terms of the agreement, which were essentially forced upon Germany, made the country:

1. Accept blame for the war
2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)
3. Forfeit territory in Europe as well as its colonies
4. Forbid Germany to have submarines or an air force, as well as a limited army and navy
5. Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.

“I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.”
– John Maynard Keynes, representative of the British Treasury

Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.

The Catalysts

1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.

This created two separate versions of the same currency:

Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks

Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.
In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.

2. Heavy Debt

Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.

Adding together previous debts with the reparations, debt exceeded Germany’s GDP.

3. Inability to Pay

The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.

Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.

Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.

Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.

4. Invasion of The Ruhr

After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.

French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.

German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone.

On top of that, more and more banknotes had to be printed to pay striking workers.

Hyperinflation

Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.

All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished.
Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2 (released sometime the week of Jan 18-22, 2016).

About the Money Project

The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.

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Click here to see Part 1.

Courtesy of: The Money Project

The World’s Most Famous Case of Hyperinflation (Part 2)

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

For the first infographic in this series, which summarizes the circumstances leading up to hyperinflation in Germany in 1921-1924, it can be found here: Hyperinflation (Part 1 of 2)

Slippery Slope

“Inflation took the basic law-and-order principles of loyalty and trust to the extreme.” Martin Geyer, Historian.

“As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans.” Karl Helfferich, an economist in 1915.

“There is a point at which printing money affects purchasing power by causing inflation.” Eduard Bernstein, socialist in 1918.

In the two years past World War I, the German government added to the monetary base of the Papiermark by printing money. Economic historian Carl-Ludwig Holtfrerich said that the “lubricant of inflation” helped breathe new life into the private sector.

The mark was trading for a low value against the dollar, sterling and the French franc and this helped to boost exports. Industrial output increased by 20% a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly.

Then, suddenly this “lubricant” turned into a slippery slope: at its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours.

When did the “lubricant” of inflation turn into a toxic hyperinflationary spiral?

The ultimate trigger for German hyperinflation was the loss of trust in the government’s policy and debt. Foreign markets refused to buy German debt or Papiermarks, the exchange rate depreciated, and the rate of inflation accelerated.

The Effects

Hyperinflation in Germany left millions of hard-working savers with nothing left.

Over the course of months, what was enough money to start a stable retirement fund was no longer enough to buy even a loaf of bread.

Who was affected?

• The middle class – or Mittelstand – saw the value of their cash savings wiped out before their eyes.
• Wealth was transferred from general public to the government, which issued the money.
• Borrowers gained at the expense of lenders.
• Renters gained at the expense of property owners (In Germany’s case, rent ceilings did not keep pace with general price levels)
• The efficiency of the economy suffered, as people preferred to barter.
• People preferred to hold onto hard assets (commodities, gold, land) rather than paper money, which continually lost value.

Stories of Hyperinflation

During the peak of hyperinflation, workers were often paid twice a day. Workers would shop at midday to make sure their money didn’t lose more value. People burned paper bills in the stove, as they were cheaper than wood or other fuel.

Here some of the stories of ordinary Germans during the world’s most famous case of hyperinflation.

• “The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week,” Eugeni Xammar, a journalist, wrote in February 1923. “As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling.”
• A man who drank two cups of coffee at 5,000 marks each was presented with a bill for 14,000 marks. When he asked about the large bill, he was told he should have ordered the coffees at the same time because the price had gone up in between cups.
• A young couple took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.
• Historian Golo Mann wrote: “The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath,” he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. “What was there to trust, who could you rely on if such were even possible?” he asked.

Even Worse Cases of Hyperinflation

While the German hyperinflation from 1921-1924 is the most known – it was not the worst episode in history.

In mid-1946, prices in Hungary doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

Peak Inflation Rates:
Germany (1923): 3.5 billion percent
Zimbabwe (2008): 79.6 billion percent
Hungary (1946): 41.9 quintillion percent

Hyperinflation has been surprisingly common in the 20th century, happening many dozens of times throughout the world. It continues to happen even today in countries such as Venezuela.

What would become of Germany after its bout of hyperinflation?

A young man named Adolf Hitler began to grow angry that innocent Germans were starving…

“We are opposed to swarms of Americans and other foreigners raising prices throughout Germany while millions of Germans are starving because of the increased prices. We are equally opposed to German profiteers and we are demanding that all be imprisoned.” – Adolf Hitler, 1923, Chicago Tribune

About the Money Project

The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.

SEE ALSO: Here's one trick to know what commodity prices are going to do next

Join the conversation about this story »

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Despite breathless coverage of Venezuela's vanishing supply of condoms, toilet paper, and beer, perhaps the country's most debilitating shortage has been that of food, which appears to be a motivating factor for growing antigovernment sentiment.

"I want the recall because I don't have food," one woman told the Venezuelan commentary site Contrapunto, referring to a referendum to recall President Nicolas Maduro that has so far reportedly drawn more than a million signatures in support.

"We want out of this agony — there is too much need in the streets," another woman told Contrapunto. "We have much pressure because there is no food and every day we have to ask ourselves what we are going to eat."

SEE ALSO: In the face of Venezuela's rising violence, the police are adding to the carnage

Soaring prices and rampant shortages of most goods have left many Venezuelans struggling to put regular food on their tables and maintain a balanced diet.

Government supporters have long pointed proudly to the improvement in eating under socialist leader Hugo Chavez, who used oil income to subsidize food for the poor during his 14 years in office (1999 to 2013) and won UN plaudits for it.

But Reuters notes that Maduro, Chavez's successor, has faced a collapse in the price of oil, which provides almost all of Venezuela's foreign income. He has also blamed an opposition-led "economic war," which critics deride as an excuse.

Living in a severe recession and a dysfunctional state-run economy, poorer families say they sometimes skip meals and rely more on starch foods, Reuters reports.

"We are eating worse than before,"Liliana Tovar, a Caracas resident, told Reuters in late April. "If we eat breakfast, we don't eat lunch, if we eat lunch, we don't eat dinner, and if we eat dinner, we don't eat breakfast."

At times, high demand and limited supplies have left Venezuela's shelves heavily stocked with items no one buys, like soft drinks, while high-demand items like milk are nowhere to be found.

According to a recent study, 87% of Venezuelans say their income is now insufficient to purchase their food needs. Shoppers routinely spend hours in lines to buy staples such as corn flour and laundry soap, turning lines into sites of shoving matches and now more frequent attempts to plunder shops.

That study of nearly 1,500 families also found a rising percentages of carbohydrates in diets, and it said 12% of those interviewed did not eat three meals a day.

To try to shore up wages, Maduro on Sunday announced a 30% minimum-wage increase, which comes after a 25% hike on March 1 and is the 33rd wage boost since 1999. Beginning this month, workers and pensioners will earn 15,051 bolivars a month — only about $13, based on the black-market conversion rate, according to El País.

That amount may become even more paltry. Venezuela's inflation rate in 2015 was 180.9%, according to the central bank, and the International Monetary Fund expects inflation in the country to reach 720% this year.

A minimum wage is now only about 20% of the cost of feeding a family of five, according to a monitoring group cited by Reuters. Lines snake around state-run supermarkets, where regulations keep prices low, from before dawn.

"You have to get into these never ending lines — all day, five in the morning until three in the afternoon — to see if you get a couple of little bags of flour or some butter,"said taxi driver Jhonny Mendez, 58.

"It makes a person want to cry."

The opposition in Venezuela's national assembly last week ordered the firing of the country's food minister because of the country's worsening food situation, though the Maduro government may ignore or circumvent the order.

Reuters recently documented the in-home food stocks of residents in Petare, a poor barrio east of Caracas where once stalwart government support has weakened over the past few years:

The country of Venezuela is dangerously approaching hyperinflation. At 2015’s year-end, official figures had yearly inflation at or above 180 percent (some private sector sources estimated it at 330 percent). The technical definition of hyperinflation is when inflation is at 50 percent or more per month, meaning that Venezuela is not yet at this point, but does seem to be approaching at an accelerated pace. The South American country finds itself with inflation rates at their worst in its history (1996 saw 103 percent yearly inflation) and the highest in the world (Ukraine is second with 50 percent yearly inflation).

The main effects of hyperinflation are beginning to be felt. In every case in history where there has been hyperinflation, the main cause has been fiscal imbalance, and the case in Venezuela is no different. When there is a surge in the deficit, the same applies for inflation (graph 2).

Normally, moderate inflation follows the path of the deficit with a relatively large delay, because economic agents are unable to anticipate deficit values and monetization with precision. On the other hand, in times of hyperinflation, inflation anticipates the deficit (economic agents overestimate new monetization policies and there is a universal tendency to evade local currency). In Venezuela, we can see that since 2013 (graph 3) inflation has increased at a faster rate than the deficit, and for this reason we can consider the country in a state of hyperinflation as of that date.

This creates a big problem for the government of Venezuela due to the fact that real tax revenues decrease (just as in all cases of hyperinflation). During the time between receipt of tax revenues and actually putting these taxes to use, inflation eats up the real value providing the government with less real revenue.

An inverse relationship exists between inflation in Venezuela and crude oil prices (graph 4). This relationship is such that inflation increases rapidly when the main source of government revenue (revenue from oil) decreases due to the fact that the government does very little to reduce costs when decreases in revenues are experienced (thus deficits are monetized and amounts of currency rise at aggressive rates).

One of the most surprising and paradoxical aspects of hyperinflation is the shortage of money. When rises in prices grow out of control (which is starting to be the case in Venezuela), the amount of new money created is not enough to suffice for these increases in prices. In other words, the real money supply drops (nominal money supply / price levels).

The last phase in all cases of hyperinflation is currency stabilization. This phase is inevitable whether it be because of changes introduced by the government or due to complete rejection of local currency by the population. In order for such a monetary reform to be successful, it is essential that the government first eliminate the main cause of the inflation (the budget deficit). Unfortunately, it does not seem as though the Venezuelan government has any plans to decrease spending, nor does it appear that revenue from oil will be recovering any time soon, meaning that any attempts at currency stabilization will surely fail (just as it did the last time when the bolivar fuerte was introduced in 2008).

In light of this situation, it seems that Theirs’ Law is inevitable. Thiers’ Law is the reverse of Gresham’s Law. Good money eventually takes bad money out of circulation as the latter becomes abandoned. Currently, the US dollar serves as a store of value for Venezuelans, and to a lesser extent, the unit of account. The only function that the bolivar currently serves is as a medium of payments, which is only a matter of time before this function is abandoned, as well (in fact, alternatives to using local currency have begun to spring up in the form of bartering and trade). Seeing that the US dollar is already serving various functions that replace the Venezuelan currency, it is all too possible that it becomes the undesired successor to the bolivar.

Most certainly, Venezuela finds itself in hyperinflation for which there exist only two solutions; drastically reduce spending and the deficit and execute monetary reform or lose the bolivar and adopt the dollar. Both are equally unpopular for the government of Venezuela, but the difference is that if the first option (the deficit) goes unattended, the second (dollarization) is inevitable. Then, one of the most anti-US governments in the world will have to accept the US dollar as its only remedy against hyperinflation.

In Venezuela, despite enormous levels of money creation; money shortages are more and more common (graph 5). While the money supply has doubled since last year, real money supply has decreased 30 percent.

This article was translated from the Spanish by Robert Goss and was first published by Universidad Francisco Marroquin. 

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The Trajectory of Venezuelan Hyperinflation Looks Familiar…

Extreme shortages of food and power continue to ravage the country of Venezuela, and ordinary people have been paying the price.

With triple-digit inflation, that “price” is expected to continue to soar even higher. The International Monetary Fund (IMF), in its most recent set April forecasts, expects inflation in Venezuela to hit 481% by the end of 2016.
Even scarier is the estimated pace of acceleration – by 2017, the IMF expects Venezuelan hyperinflation to climb to a whopping 1,642%.

Our brains have trouble computing numbers of this magnitude, so we created today’s infographic to put things in perspective. We look at it from two angles, including a historical comparison as well as a more tangible example.

Courtesy of: The Money Project

This Pattern Looks Familiar…

If the chart for the Venezuelan bolivar looks eerily familiar, it may be because its trajectory thus far is almost identical to that of the Papiermark during hyperinflation in the Weimar Republic from 1918-1923.

Although the Papiermark would eventually peak at an inflation rate of 3.5 billion percent in 1923, the pace of inflation started relatively modestly. It started in the double-digits after the war in 1918.

This is similar to today’s bolivar. In 2013 and 2014, the pace of inflation in Venezuela was increasing, but still confined to double-digits. Now things are accelerating fast, and if the IMF is correct with its predictions, there could be huge consequences.

Could Venezuelan hyperinflation ever hit the peak levels associated with Weimar Germany? It’s hard to say, but it’s not impossible.

A More Tangible Example

To put things from a more tangible perspective, let’s do the math based on IMF projections to see what may be in store for ordinary Venezuelans.

• In 2012, one U.S. dollar could buy approximately four bolivars.
• At the end of 2015, one U.S. dollar could buy 900 bolivars at the black market rate.
• Based on IMF projected inflation rates, by the end of 2017, one U.S. dollar should be able to buy 90,000 bolivars.

Where things go after that is anybody’s guess.

About the Money Project

The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.

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There are a lot of stats you can cite to describe the dysfunction gripping Venezuela at the moment.

Almost 90% of the country says their incomes are insufficient to meet their food needs. Auto production shriveled 86% in the first half of the year, to just 10 units a day. The country's production of oil — which accounts for 95% of its export earnings — fell to a 13-year low in June (and its likely to decline further). Approval for President Nicolas Maduro shrunk to 23.3% in May, the lowest since October 2015.

Perhaps the most damning figure is Venezuela's inflation, which the IMF sees rising close to 4,000% by 2020, as unemployment tops 20%, according to price-calculation website How Much, which produced the graphic below:

Venezuela's outlandish inflation has proven difficult to pin down. The end-of-year inflation rate of 720% forecast by the IMF for 2016 vastly outstrips the median of 184% derived from a Bloomberg survey of economists in January, and it exceeds the high of 700% inflation predicted by Nomura Securities.

Consumer-price inflation is supposed to hit 481% this year and to top 1,600% next year, according to IMF stats. Venezuela's central bank said in February that inflation for 2015 rose to 180% and the economy contracted by 5.7%.

As How Much notes, the rate of Venezuela's inflation increase is likely to slow (3.5 times between 2016 and 2017 to 1.1 times between 2019 and 2020), and, according David Smilde, a Tulane professor based in Venezuela, the country's central bank has slowed the amount of money it puts out.

"Yet inflation has continued apace, most likely motored by the decline in production and importation of goods," Smilde writes. "This has created a scarcity of liquidity at many levels of the economy, with banks having daily withdrawal caps."

Shrinking supplies of money, coupled with sky-high prices and rampant scarcity of consumer goods, has created a much more immediate problem for Venezuelans: no food.

This past weekend, more than 120,000 Venezuelans swarmed across the western border, mobbing shops and groceries in the Colombian city of Cúcuta.

That much-needed outlet appears to have been short-lived, as the Colombian foreign minister said on Tuesday that there would be no more temporary openings of the border, which has been closed for almost a year; instead, the two countries will continue negotiating to open the frontier permanently.

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Back in 2008, Zimbabwe experienced an episode of horrific hyperinflation as a result of Robert Mugabe's economic policies. Mugabe implemented price controls and the country's central bank printed endless amounts of money in an effort to end its economic slump. Those policies caused Zimbabwe's inflation rate to explode to a mind-boggling rate of 231,000,000% officially, while others have suggested the actual inflation rate was greater than 4,000,000,000%. "Where money for projects has not been found, we will print it," Mugabe said. 

Zimbabwe's government responded by introducing the US dollar along with a combination of South African rand, and other foreign currencies. It even went as far as expunging the Zimbabwean dollar from its banking system back in June 2015. While those measures seceded in bringing Zimbabwe's hyper-inflationary spell under control, it created a new problem, deflation, as the dollar became more widely used. 

According to a note sent to clients in July from Exotix Partners' Head of Equity Research Kato Mukuru, that dollarization of the Zimbabwe economy created two problems. 

1. There has been too much reliance on the US dollar. The government moved away from the multi-currency regime and said it would conduct all of its transactions dollars. And since most of Zimbabwe's trade is with South Africa, the strong dollar (compared to the rand) has made it more difficult for Zimbabwe to compete.
2. Zimbabwe has been running a current account deficit since 2009. Zimbabwe has been exporting more dollars than its been importing, causing a shortage of dollars in the system. 

These two things have made it more difficult for Zimbabwe to attract foreign capital into the country, and has created a wave of falling prices. Official government data from June showed consumer prices were down 1.37% in June, after falling as much as 7.5% in October 2015. 

Liquidity problems could cause the government to de-dollarize the economy sooner than expected, warns BMI Research, and that would send the country back into a cycle of rapid inflation. From BMI's note"

"Adoption of a local currency would inevitably result in a rapid increase in the supply of broad money, as the central bank looked to inject enough liquidity into the economy to alleviate the ongoing cash shortage, caused by the current reliance on the US dollar. Without a simultaneous increase in real production, this would increase inflationary pressures."

As for how high inflation would get, BMI believes that would "depend on the rate at which the RBZ printed the new currency," but could easily surpass 30%. 

That's not as crazy as it got a few years ago, but it seems as though Zimbabwe finds itself in a Catch-22. 

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Every now and then it helps to dig through the past.

Let's rewind back to 1920s Germany.

Back then the country was stuck in a less-than-ideal economic situation after the suspension of the gold standard and Kaiser Wilhelm II's failure to pass an income tax to help pay for World War I.

So, to deal with the huge debts left over after the Great War, the president of the country's central bank, Rudolf von Havenstein, printed up a ton of money.

But that plan backfired. It led to skyrocketing hyperinflation, economic breakdown, weaker institutions, and a destabilization of German politics.

Reading about hyperinflation and actually understanding the massive numbers involved are two different things. To that end, UBS legend Art Cashin revisited this moment in history in his daily commentary on Tuesday to touch on how mind-blowing these figures really were — and how bad the human brain is at grasping extremely large values.

From his note:

"So, on this day government officials decided to bring figures in line with market realities. They devalued the mark. The new value would be 2 billion marks to a dollar. At the start of World War I the exchange rate had been a mere 4.2 marks to the dollar. In simple terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get one dollar. And thirteen months from this date (late November 1923) you would need 4.2 trillion marks to get one dollar. In ten years the amount of money had increased a trillion fold.

Numbers like billions and trillions tend to numb the mind. They are too large to grasp in any 'real' sense. Thirty years ago an older member of the NYSE (there were some then) gave me a graphic and memorable (at least for me) example. 'Young man,' he said, 'would you like a million dollars?' 'I sure would, sir!', I replied anxiously. 'Then just put aside $500 every week for the next 40 years.' I have never forgotten that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a.....trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp.

Let’s take a different tack. To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic....like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins.

In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid-month it was $100 billion. Then it all collapsed.

Let’s go back to 'marks.' In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nation just 10 years earlier)."

These sorts of numbers are generally difficult to picture: It's pretty hard to imagine walking into a store and forking over 428 billion marks for a loaf of bread.

So, sometimes, in order to get a better sense of how crazy things were, it helps to share a few anecdotes. Here are some, courtesy of The Economist:

"At its height, prices were rising so fast that waiters had to climb on tables to call out new menu prices in restaurants every half hour. Banknotes became sufficiently useless that workers had to bring wheelbarrows with them to work to collect their daily pay, and bundles were given to children to play with, being cheaper than actual toys."

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JOHANNESBURG/HARARE (Reuters) - When President Robert Mugabe scrapped the Zimbabwe dollar in 2009, most of his people thought this meant the end of runaway money-printing and hyperinflation that had rendered the currency worthless. They may have been wrong.

Adoption of the U.S. dollar and South African rand eight years ago brought financial discipline and currency stability to the country; today the old 100,000,000,000,000 Zimbabwe dollar note holds nothing but curiosity value.

Yet behind the scenes the authorities are once again busy creating their own money from nothing, economists and opposition politicians say. This has allowed the government to borrow heavily via treasury bills to pay a huge civil service, on whose loyalty Mugabe has relied during his 37 years in charge.

Last year Zimbabwe launched a surrogate currency, paper 'bond notes' which are designed to ease acute shortages of U.S. and South African cash in the country. This program is backed by a $200 million loan from the African Export Import Bank.

But the central bank is also creating dollar surrogates in the electronic banking system on a far grander scale, and this money lacks the backing of sufficient currency reserves or gold - the prerequisite of any stable unit.

It is these electronic dollars, nicknamed "zollars" by economists, that are raising fears that Zimbabwe might be heading for its second financial collapse in a decade.

"It's a Ponzi scheme, a pyramid scheme," former finance minister Tendai Biti told Reuters. "The implosion is coming. You can't defy economics. You can't defy fundamentals."

Biti held the post in a 2009-2013 unity government that comprised Mugabe's ZANU-PF party and the opposition. It conquered hyperinflation after the rate had reached billions of percent, before ZANU-PF regained sole power four years ago.

An opposition leader, Biti remains a staunch opponent of 93-year-old Mugabe, but some economists share his worries.

"They are creating money without anything to back it up. It's just fiction money," one analyst at a Harare-based asset management firm told Reuters. "The question is how long can they keep doing this before the system collapses?" said the analyst, who asked not to be named for fear of recriminations.

Since dollarization, the central bank has not published currency reserve figures but last month it said local banks had $250 million in offshore accounts, equal to Zimbabwe's import bill for just two weeks.

Zimbabwe can ill afford another crisis. Full of economic promise at independence in 1980, it has never fully recovered from a slump that began in 2000 with the violent seizure of thousands of white-owned farms. Unemployment runs at 80 percent.

Neither Reserve Bank of Zimbabwe Governor John Mangudya nor Finance Minister Patrick Chinamasa responded to Reuters requests for interviews. They also did not respond to emailed questions.

Surrogate currency

Launched in November, the small-denomination bond notes are officially valued at 1:1 to the dollar but cannot be easily exchanged into U.S. currency.

Businesses are charging higher prices when customers pay with the domestic bond notes rather than with dollar bills issued by the U.S. Federal Reserve. This is because the firms often have to buy U.S. currency at a premium on the black market to purchase the imported goods they sell.

"Firms' prices reflect that one U.S. dollar in hard cash is equivalent to $1.30 in bond notes, meaning that the surrogate currency has already lost 30 percent of its value," Chantelle Matthee, an analyst at NKC African Economics in neighboring South Africa, said in a note earlier this month.

Officially inflation scarcely exists. Consumer prices rose 0.06 percent year-on-year in February, the national statistics agency reported.

This data is based on dollars but things are different in the real world of surrogate currency. In Harare, firms selling car parts from South Africa have raised prices 40 percent this year; the costs of imported items such as dishwashers, cheese and breakfast cereal are up as much as 25 percent.

In the banking system, a devaluation also appears underway. Assessing the true value of zollars is difficult but economists have revived a gauge used during the hyperinflation era - the Old Mutual Implied Rate.

This compares share prices of the Old Mutual insurance firm in Harare and in London, where it has its primary listing. Toward the end of last year, around the time the bond note plan was announced, the Harare shares began trading at a sizeable premium.

Old Mutual in Harare closed at $3.51 last week compared with the sterling equivalent of about $2.77 on the London Stock Exchange. So, Zimbabweans need more dollars than people in London to buy the same shares. While a number of factors may be at play, this suggests their currency is worth less, even though its face value is officially at par to the dollar. 

Secret sales

Commercial banks are borrowing zollars created by the Reserve Bank. They are then lending them on to the government in return for treasury bills, IOUs known as T-bills.

Private sales of T-bills to the banks and other institutions such as pension funds have raised much-needed funds for the government - it is running big budget deficits to pay a public sector wage bill that swallowed up 91 percent of 2016 spending.

Last year the government was late in paying civil servants, including the army, for several months in a row. When doctors and teachers started striking to demand $180 million of promised year-end bonuses, it caved in.

Despite a constitutional demand for parliamentary oversight of public debt, no details of the T-bill sales are published, making it hard to know exactly how much debt Harare has racked up on top of the $8.5 billion it owes international creditors.

Bankers are concerned by secrecy surrounding the debt sales the Reserve Bank runs. "We urge the central bank to revisit the auction system of treasury bills... to ensure that there is transparency," Charity Jinya, head of the Bankers Association of Zimbabwe, told a parliamentary finance committee in February.

Estimates of the government's domestic debt, based on official figures, media reports and information from local asset managers, are as high as $5 billion, equal to around 35 percent of Zimbabwe's annual GDP.

Official data point to accelerating borrowing as ZANU-PF gears up for parliamentary and presidential elections in 2018. In the three full years since it regained outright power, the government has run deficits of $200 million, $295 million and $1.4 billion respectively, finance ministry figures show.

That final shortfall, in 2016, was from a deficit initially projected at just $150 million.

Harare has also borrowed to pay for other items, including $1 billion to recapitalize the central bank and clear its debts, and $550 million for ZAMCO, a state-run 'bad bank' set up to handle sour debts from the 2008/09 meltdown.

'Not in control'

Harare's options are limited. Tax revenue is flat due to a weak economy, which grew only an estimated 0.6 percent last year. The government cannot borrow heavily abroad due to arrears it built up with multilateral lenders.

When the T-bills are due - they have maturities from three months upwards - they are simply rolled over with the issuance of longer-dated debt, several asset managers involved said.

Commercial banks' T-bill holdings have jumped from zero in 2013 - the year ZANU-PF regained outright power - to $1.4 billion at the end of last year, according to central bank figures.

However, bankers play down the risks. "At this point there is no doubt in our minds that as any parcel of the Treasury Bill that we are holding matures, we are going to be paid," Never Nyemudzo, chief executive of CBZ, Zimbabwe's biggest bank, told an analysts' briefing last month.

Meanwhile, signs of inflation grow. The basic measure of money supply jumped 40 percent last year, while bank deposits grew from $5.6 billion to $6.5 billion despite the stagnant economy.

"The government is not in control," said University of Zimbabwe economics professor Tony Hawkins. "Events are controlling them and it will be a hard landing when it comes."

(editing by David Stamp)

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