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Hyperinflation Unfolds Only When Public Confidence Collapses
COMMENT: Mr. Armstrong, I read your piece on South Africa and you are the only person to explain that the hyperinflation in Zimbabwe took place after they stole all the land from the white farmers. You really turn over every stone in your research.
My hat is off to you sir.
MH
ANSWER: Well I was not aware of that, but it does not surprise me. Everyone attributes hyperinflation to the simple increase in the supply of money. I have stressed countless times that hyperinflation unfolds ONLY when people NO LONGER TRUST THE GOVERNMENT! The Zimbabwe hyperinflation ended the same way as Germany. Once Zimbabwe expropriated white farmers without compensation, public confidence collapsed. Nobody would invest in Zimbabwe after that. This is what South Africa now risks. Nobody will invest in a country that does not respect property rights. This is what we call COUNTRY or POLITICAL RISK!
The French hyperinflation took place with the assignats, which were issued in conjunction with the revolution. They were so interested in robbing the rich and even the Catholic Church, that the confidence in banks and the government collapsed.
I have also shown numerous times that the famous German hyperinflation followed the Communist Revolution in 1918, which established the Weimar Republic. Once again, if you had any wealth, you hoarded it. People held foreign coins as the alternative to German currency.
In Venezuela, once more it is the collapse in the confidence of government that compels it to produce more and more money to pay its troops. This is the net effect once again when people no longer trust the government and wealth is hoarded using foreign currency – in this case, American dollars.
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The Varoufakis Effect?
The Varoufakis Effect?
ATHENS – In his end-of-2015 missive, Holger Schmieding of the Hamburg investment bank Berenberg warned his firm’s clients that what they should be worrying about now is political risk. To illustrate, he posted the diagram below, showing how business confidence collapsed in Greece during the late spring of 2015, and picked up again only after my resignation from the finance ministry. Schmieding chose to call this the “Varoufakis effect.”
There is no doubt that investors should be worried – very worried – about political risk nowadays, including the capacity of politicians and bureaucrats to do untold damage to an economy. But they must also be wary of analysts who are either incapable of, or uninterested in, distinguishing between causality and correlation, and between insolvency and illiquidity. In other words, they must be wary of analysts like Schmieding.
Business confidence in Greece did indeed plummet a few months after I became Finance Minister. And it did pick up a month after my resignation. The correlation is palpable. But is the causality?
image: http://www.project-syndicate.org/flowli/image/varoufakis14-graph/original/english
Consider the following example. Business confidence fell in September 2001 (following the terror attacks on New York and Washington, DC), while Paul O’Neill was US Treasury Secretary. Would Schmieding label a chart showing that decline the “O’Neill Effect”? Of course not: the drop in business confidence had nothing to do with O’Neill and everything to do with fears about global security. The correlation with O’Neill’s tenure was irrelevant.
Similarly, in the case of Greece, the collapse in business confidence happened under my watch. But the cause was that our creditors, the so-called Troika (the European Commission, the European Central Bank, and the International Monetary Fund), made clear that they would close down our banking system to force our government to accept a fresh extend-and-pretend loan agreement.
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