Bolivia spent the 1970s borrowing large sums from abroad. This wasn't a problem as long as its foreign creditors were willing to roll over their loans. And they were willing to do so, until the early 1980s. Then, things changed. Bolivia's slowing exports scared away its lenders. Suddenly, Bolivia had to start paying back its mountain of debt.

Bolivia couldn't afford to pay back its foreign creditors and spend on its own people. The government decided that the easiest way to prioritize was not to prioritize. Rather than cutting spending or hiking taxes, they would pay for everything thanks to the magic of the printing press. It was easy, but -- spoiler alert! -- it did not end well. Inflation spiked to 11,750 percent, on an annual basis. More currency chasing the same amount of stuff makes the money worth less. As a result, you need to print even more just to tread water. This is what separates hyperinflation (the examples above) from merely bad inflation (the 1970s in America).



Hyperinflation isn't always just a matter of government incompetence. It's a matter of desperation. It typically begins with an economic implosion. War and revolution are the usual suspects -- or, in Zimbabwe's case, an ill-advised land reform. The economic collapse begets a collapse in tax revenues. Perversely, this makes the government look like a terrible credit risk. Cut off from international lenders, the government is left with a gaping hole in its budget, and no way to fill it. The choice is between pain today from austerity or pain tomorrow from printing money.



It gets worse. These governments usually have piles of foreign debt to pay off, too. Whether it's from reparations or excessive borrowing doesn't matter so much. What matters is that big chunks of what cash the government does have is earmarked for foreign creditors. That's politically toxic in a society going through a collapse. For politically weak governments, the temptation to substitute an inflation tax for actual taxes is enormous.



Of course, we all know how this story ends. Much, much more money chasing much, much fewer goods sends prices into the stratosphere.



COULD IT HAPPEN HERE?





How are the United States' historic budget deficits, money-printing and depressed economy any different from the country's that have experienced hyper-inflation? The three-part answer is: (1) we don't have any problems selling our debt; (2) we aren't actually printing money; and (3) the United States is a highly productive economy that is nothing like bombed-out Budapest.



Let me unpack these one by one. Right now getting the markets to buy our debt isn't the problem. Getting enough debt for the markets to buy is the problem. Investors are so crazy to load up on Treasuries that they're actually paying us to borrow, taking inflation into account. But while we're currently getting free money from investors, Hungary circa 1945 was getting no money. It was an investment pariah. If Hungary wanted to rebuild its economy, its only recourse was the printing press.



Second, the United States isn't really printing money. At least not like post-war Hungary. Quantitative easing is usually described as "money-printing" but it's not really. QE involves the Fed buying longer-term bonds from banks. It simply swaps one asset for another -- in this case, cash for longer-term bonds. Unlike Hungary, the Fed isn't directly paying the Treasury's bills. This is a hugely important distinction.



Whatever money the Fed "prints" is stuck in the banks. That money isn't inflationary as long as the banks don't lend it out. What if the banks do start lending at a faster clip? The Fed can still effectively pay the banks not lend by, for example, raising the interest on excess reserves or require the banks to set aside more money. It would be shocking for the Fed not to pursue one of these options.



Third, the most important difference between us and post-war Hungary or Weimar is that our roads haven't been razed to the ground and half the country isn't striking. It's very difficult to have hyperinflation when you still have a functioning economy. Almost all examples of hyperinflation result from huge economic shocks that devastate an economy so much that leaders think printing money is the only solution to growth. As bad as the Great Recession has been, our GDP is already back to and above its all-time pre-recession high. As bad as unemployment is, more than 80 percent of the labor force is working. In Zimbabwe, 80 percent of the population was unemployed.



Let's conclude with a modest proposal for an economic corollary to Godwin's Law. The first person to reference Weimar's hyperinflation in an economic debate automatically loses.



Photos 1, 3, 5, 6 from Reuters. Photos 2 and 4 from Wikimedia.



LEARNING FROM THE PAST

The Cliff Notes version of how to avoid hyperinflation is not to print too much money. The more you print today, the more you'll need to print tomorrow.

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