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Friday, June 27, 2008 - Vol. 10, No. 154
Today's comment is by John Pugsley, Chairman of The Sovereign Society and best-selling author.
How would you like to be a billionaire? It's easy. Just move to Zimbabwe. This country's entire population of over 12,000,000 are billionaires. In fact, many are trillionaires, or even quadrillionaires.
However, be careful what you wish for. As citizens of Zimbabwe have discovered, these riches are a curse rather than a blessing.
Let me explain. The minimum wage in Zimbabwe last month was Z$3.9 billion, and the average workers monthly salary was a magnificent Z$15 billion. Unfortunately for the worker and his family, his whole monthly Z$15 billion dollar paycheck wasn't quite enough to buy a bar of soap. In fact, it takes Z$10 billion to make a single U.S. dollar as of this week.
Last week, a pint of milk (if you were lucky enough to find one in the store) cost Z$3 billion, a single egg, Z$4 billion. A pound of margarine cost Z$25 billion and a pack of 10 cookies costs Z$19 billion. That was last week. Prices are even higher today.
You Have to Be a Quadrillionaire to Afford a House
If you think eggs and cookies are dear, real estate transactions are carried out in quadrillions (in case you're unfamiliar with "quadrillions," a quadrillion is a million billion, or a 1 followed by 15 zeroes).
Houses in the less desirable, high-density neighborhoods are going for Z$1-3 quadrillion, while houses in better neighborhoods will set you back up to Z$20 quadrillion. But get you bid in now - prices are going up.
Meanwhile, Zimbabwe's stock market has historically been a refuge for investors during periods of inflation. But recently stock prices also have soared. The Zimbabwe Stock Exchange industrial index leapt to a new high above 900 billion points last week, from just over 1.2 billion points in January.
That's what happens during hyperinflation. The Zimbabwean experience is not a new phenomenon. Ever since the invention of paper money, the excesses of politicians and bankers have led to hyperinflation in dozens of countries.
My Personal Currency Collection Shows the Horror of Hyperinflation
I have a small collection of paper currencies from other countries that achieved this distinction. One piece is a large, beautifully-engraved German 100-mark note from 1910. When issued it was the equivalent of US$25, or roughly 1.25 ounces of gold.
As World War One progressed, the German government began expanding the money supply to pay for the war. By 1920, 100 marks would buy only US$1, or 1/20th of an ounce of gold.
At war's end, the Germans had to pay war debts, so the money presses began rolling day and night. The government devalued the currency so much that it reached 9,000 marks to the dollar in January 1923. Then just six months later, it was 100,000 marks to the dollar. Then by August of that same year the exchange rate was an astounding 4.62 million marks to the dollar.
My collection contains a piece of German currency printed in September 1923. The September version of the mark was no longer the large, engraved, and very beautiful paper. By then, the German currency was half the size of the current U.S. dollar. It was printed on cheap paper on one side only, and carries the legend, Twanzig Millionen Mark, or 20 million marks.
That 20-million mark note wouldn't buy a single bite of bread. By the end of the hyperinflation a loaf of bread cost 580 billion marks. And so it goes in Zimbabwe today. A loaf of bread, which cost about Z$15 million two months ago, last week cost about Z$600 million.
Celebrating Hyperinflation's 132nd Anniversary Here in the U.S.
This year marked the 132nd anniversary of the beginning of hyperinflation right here in the United States.
Faced with the problem of funding the struggling Continental army in 1776, the "United Colonies" decided to issue currency to pay the troops. The notes were called "Continentals." In my paper currency collection, I also have one of those notes. At the time, Americans started saying "not worth a Continental" instead "worthless."
Price inflation has existed for thousands of years. It's been present in every society advanced enough to use a general medium of exchange. And it's universally feared.
To observe inflation throughout history, you would think it is a blight of nature, like earthquakes, hurricanes and the common cold. Each time inflation strikes a nation, it's denounced, reviled, and cursed by citizens, economists, and politicians alike. Yet despite the fact that policymakers have fought it for centuries, price inflation survives untouched.
Once again, inflation is rising again around the world, and once again the United States is in the thick of it.
On Wednesday the Federal Reserve Board met to address the nation's current economic malaise. Once again, Chairman Bernanke announced that he wouldn't be lowering rates (that is, printing more money) this time.
"Although the downside risks to growth remain," his statement said. "They appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."
Good rhetoric, but I'm afraid it's too late. The world is already awash in fiat dollars, and more are on the way for the same reason that Zimbabwe's central bank keeps printing Zimbabwean dollars.
Where Does Hyperinflation Come From?
Johns Hopkins University economics professor Steve H. Hanke, in a research paper published last week about the Zimbabwean hyperinflation explained it:
"The source of Zimbabwe's hyperinflation is the Reserve Bank of Zimbabwe's money machine. The government spends, and the RBZ finances the spending by printing money. The RBZ has no ability in practice to resist the government's demands for cash."
It is no different in the U.S. The government borrows, and the Fed finances the borrowing by printing money. Like the Reserve Bank of Zimbabwe, the Federal Reserve has no real ability to resist the government's demand for loans.
The late Nobel Laureate economist Friedrich von Hayek stated it bluntly more than 30 years ago in his essay, Denationalization of Money:
"Since the function of government in issuing money is no longer one of merely certifying the weight and fineness of a certain piece of metal, but involves a deliberate determination of the quantity of money to be issued, governments ..., it can be said without qualifications, have incessantly and everywhere abused their trust to defraud the people." [Emphasis added.]
So, be cautious as you dream of becoming a billionaire. With the help of central bankers, you may just get your wish. Don't rely on their intelligence or knowledge of economic history to protect you, either.
Central banks are not the solution. Central banks are the instruments that defraud everyday consumers like you. Nor does it matter which candidate gets elected in November. Government spending will continue to increase, as will the central bank's need to inflate the currency.
The only answer for the individual is to understand how to defend against the fraud of paper-money inflation. This is the very mission of The Sovereign Society. If you're not already a member, click here to join!
JOHN PUGSLEY, Chairman
P.S. My colleague, Jack Crooks gave a special webinar presentation on Tuesday to explain how to protect yourself from the latest round of money devaluation. I hear 5,000 concerned readers joined us for this webinar on Tuesday. But in case you missed it, you can listen in right now for FREE, just by clicking here.
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