Hyperinflation: Buzzword or a Coming Horrific Reality
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Editor's Note
America and governments worldwide now face an explosive debt problem. The U.S. federal budget deficit is now estimated to grow to $3.4 trillion in 2021.
This makes it the highest deficit in America's history. Indeed, the 2021 deficit exceeds the pandemic-caused 2020 deficit of $3.1 trillion.
News of the exploding yearly federal deficit is typically greeted by both the media and the general public with a nationwide yawn.
Realistically speaking, most people do not understand the "inflationary" potential impact of ever-increasing deficits on their lifestyles, way of life, safety and pension/Social Security retirement plans.
Said celebrated liberal economist Robert Samuelson in the Washington Post: Unfortunately, "politicians want to win, so they tell voters what they want to hear… So on we stumble, blind to the dangers [of rising deficits] ahead.
A Startling Prediction
Wrote Peter F. Drucker: "… In 1942… Harvard economist… Joseph Schumpeter (1883-1950) published his best-known book, Capitalism, Socialism and Democracy, still, and deservedly, read widely… In this book, he argued that capitalism[and democracy] would be destroyed by its own success…"
One of Schumpeter's key points was in an "entitlement-rich" and welfare-driven society, tremendous pressure is put upon politicians to keep supplying "the free goodies" in order to keep getting re-elected.
This reality forces politicians to run higher and higher deficits, which, in turn, provide the motivation for printing more money and raising individual and corporate taxes.
A Review of Today's Inflation Realities
By now, many informed citizens realize America is facing a potential galloping inflation. Indeed, it's quite possible – given current trends – double-digit inflation is becoming more likely.
Many economists now believe given the inflation rate October 2021 – 5.4% – a longer-term inflationary trend is emerging.
Indeed, taking the most recent inflation rates – and putting them on an annualized basis – some authoritative economists claim our current inflation rate is much closer to 8 to 10%.
Further, paraphrasing several high-ranking economists "If the same basket of goods used to calculate price indices during the Carter administration was still in effect, our inflation rate would be approaching double digits."
"Inflation could spike to 20% in the next few years as the U.S. money supply explodes," says Wharton professor Jeremy Siegel.
We all know about today's predicted long-run supply shortages (e.g., Intel expects the global chip shortage to continue until 2023 which will hamper the production of everything from computers to cars… Beer manufacturers cannot sell their product in quantities demanded because they cannot receive an adequate supply of bottles).
The purpose of this article is to explain – in clear, practical language – basic economic concepts that will help you better understand today's new economic realities – and then judge for yourself what you think is apt to happen.
Before We Begin… Let's Review Two Operational Definitions
- The annual federal deficit is defined as the difference/shortfall between what the federal government collects in revenue (mostly through taxes, fees and investments) and what it spends per year.
To repeat: A budget deficit occurs when government spending exceeds revenue. In 2021 it’s estimated that America will spend $3.4 trillion more than it receives. That's a big difference! - The accumulated public debt is the sum total of past deficits. Currently, America's accumulated public debt totals more than $27 trillion and is rapidly increasing.
How Are Deficits Financed?
Politicians of all stripes always turn to printing more money & raising taxes to finance mounting deficits.
All this is hardly news for many readers. Printing money over the years has acquired a fashionable new name – quantitative easing.
Both these solutions (i.e., printing money/raising taxes) have proven disastrous and become virtually unstoppable in the hands of those with little knowledge of basic economics and economic history.
Printing money is a potentially galloping inflation solution, especially at the very low-interest rates currently in place and projected for the next several years.
Raising corporate and individual taxes significantly higher levels inevitably dampens consumer spending & business investment creating a slow/no-growth economy. (We detail the reasoning of this assertion later in this article).
A Quick Digression
Printing money and raising taxes are not the only ways to finance deficits.
Peter F. Drucker, provided us with a structured approach for reinventing/rethinking government agencies. His methodology is detailed in his book, The Five Most Important Questions: A Self-Assessment Tool.
The Clinton/Gore administration enacted The Government Performance and Results Act, GPRA, (1995) that required every government agency to prepare a meaningful strategic plan (what the agency should be and how it will get there) before the agency's budget would be approved.
A congressional subcommittee had to review each and every plan (which also contained a set of performance metrics that enabled each agency to judge whether or not they were succeeding with their plan) – and could therefore take corrective action when planned versus actual results deviated.
The Clinton/Gore administration did accomplish what now seems impossible – a balanced budget. Whether or not it was entirely due to formalizing the "rethinking of government agencies" is difficult to determine. But it certainly helped!
The GPRA was heavily influenced by the book Reinventing Government by David Osborne & Ted Gaebler. The authors graciously credited Drucker's writings as their major inspiration.
The point? The strategic planning process used by the government agencies forced them to determine what to abandon and how to abandon result-less activities and programs (which amount to trillions of dollars)… identify high yield areas to concentrate resources… avoid funding problems (as opposed to funding solutions)… and host of other mission-critical tasks to make each government agency capable of producing tremendous increases in performance, quality and service.
The Drucker methodology is not primarily concerned with cutting expenses; it’s concerned with making each government agency more effective. (We will in the near-future detail the Drucker process which would enable significantly less reliance on the printing money/raising taxes approach).
Take-Home Message
Printing money and raising taxes above certain levels always produces disaster. Drucker showed how to avoid this inevitability through the usage of a structured strategic planning approach.
Whether it be attributed to laziness or ignorance, most government administrations do not encourage using this alternative to printing money and raising taxes.
In fact, there is no point in blaming this or that president; neither is it the fault of Democrats or Republicans.
Individuals must be motivated to learn. They must be equipped with the appropriate experiences and knowledges to realize what's needed.
None of us has time for continuous trial and error learning. Politicians (like everyone else) must learn more and more from the experiences of others.
Learning is nothing more than thinking with other people's ideas. Happily, there's no law against it.
It's only when the results of printing money and raising taxes create (predictable) unthinkable disasters, do worldwide leaders turn to Drucker-like approaches which, almost always, work like a wonder drug for turning around an economy after it has floundered or collapsed under the print money/raise taxes solution to deficit financing. (See: Hyperinflation of Poland.)
The Message Is Crystal Clear
George Santayana (1863-1952), who, in his Reason in Common Sense, The Life of Reason, Vol.1, wrote, "Those who cannot remember the past are condemned to repeat it."
Of late, some have taken license to reword this powerful reminder to: "Those who do not learn history are doomed to repeat it." Apparently, many government decision-makers have not learned what economic history tells us.
A Quick Economic History Lesson: Venezuela
Venezuela – once its prosperous oil revenues declined and made it impossible to keep providing all the "freebies" initially promised its electorate – pressed the print money and raise taxes buttons to pay for runaway deficits.
The result? Hyperinflation which destroyed the purchasing power of its population's accumulated savings, promised future retirement benefits and virtually ground to a halt the Venezuelan economy.
Economic history reveals similar excessive printing money/raising taxes outcomes occurred in Yugoslavia, Hungary, Germany, Greece, China, France, Taiwan, Peru, Poland, Congo (Zaire), Russia/USSR, Moldavia and many more.
In every one of these cases, hyperinflation can be traced to out-of-control national budgets, social upheavals, political chaos and other factors.
In every case, the government tries to stimulate the economy by printing more money & raise taxes to pay for mounting deficits.
This money creation increases the money supply for a short period, but the increased circulation causes a given country's currency to lose substantial value accompanied by a disillusioned, embittered, much poorer middle-class. (This point is covered in more detail further in this article).
Venezuela, home to the world’s largest oil reserves, is still starved for capital and desperate to regain access to global debt and commodity markets after two decades of anti-capitalist transformation and four years of crippling U.S. sanctions.
How Reuters/Stringer Summed up the Current Venezuelan Situation
"CARACAS, June 16, 2021 (Reuters) - Venezuelan consumer prices rose 28.5% in May, more than the 24.6% rate reported in April, central bank data showed on Wednesday, as the crisis-stricken OPEC nation struggles to contain inflation…
…The price increases in May brought the annual inflation rate to 2,719%, according to Reuters calculations based on central bank data.…
… Venezuela's monthly minimum wage is now equivalent to just over $3, meaning many in the poverty-stricken nation depend on remittances from relatives abroad or side gigs to survive…"
To Summarize
Authoritative economists attribute the years of runaway Venezuelan inflation which, in turn, led to a devastating recession primarily to the government's excessive printing of bolivars to cover gaping budget deficits as the reason for the downfall of this once mighty nation.
We consider Venezuela a powerful example of George Santayana's proverb.
Plus, we recommend googling all the countries mentioned above who were devastated by incompetent regimes, who recklessly printed money and raised taxes – especially, read the link provided above about how Poland turned itself around in 1989.
Digging Deeper Into Solution #1: Printing More Money
More money in circulation without corresponding increases in goods and services always translates into “too much money chasing too few goods.”
Jay Prag, a much-celebrated economics professor at The Peter F. Drucker and Masatoshi Ito Graduate School of Management, provides an easy-to-understand explanation between printing money and prices:
“Simplifying things a bit, suppose the economy is 100 apples that are sold once a year and the money supply is $100 that is used once a year. The price of apples would be $1 per apple…
…If we increase the total money supply to $1000, but we don't change the number of apples or the frequency with which money is used, the price of apples would rise to $10 per apple; more money is chasing the same amount of goods…
…If the money supply increases every year by more than the supply of apples, the price of apples will rise every year and inflation occurs - a sustained increase in prices…”
Bottom line: In a very real sense this is what's happening. The government is printing more money. But they're not doing anything (that's working) to produce significantly more “apples” (i.e. goods and services).
Is the Current Rise in Prices Largely Reflecting Transitory Factors?
Some say the increasing rising prices will be short-term; they think current supply chain dislocations and labor shortages are temporary.
For example, just when demand is surging in hospitality businesses of all kinds, worker shortages, unpredictable supplies of high demand foods and rising costs prohibit a successful rebound. This reality is occurring in many other industries.
True, this may be temporary. But many believe – with respect to many other industry sectors including hotels and restaurants – it will take a long time for things to return to normal.
Why Will It Take so Long?
Because most consumer goods are complex – in that the final finished product depends on dozens if not hundreds of individual parts produced in multiple countries and transported to a final assembly point in a coordinated manner.
The problem? Products produced from a global supply base continue to be seriously impacted by Covid-19.
Experts have repeatedly warned this is not a quick fix; once the supply flow is abruptly destabilized, it remains destabilized for quite some time into the future.
The point? Combine this with the glut of money now available and you have a likely long-term "too much money chasing too few goods" inflationary problem. (Re-read Dr. Prag's Apple economy example above).
Organizations won't be able to produce "the needed number of apples" to produce the needed economic growth required to keep inflation at bay.
As some wise person once said: "it's easy to see the problem if you look."
Digging Deeper Into Solution #2: Raising Taxes
The alternative (or simultaneous action) to printing money has always been to raise taxes.
Simply put, when things get out of hand, politicians, in many instances, also raise individual and corporate taxes to levels that sequentially dampen consumer spending and capital spending by businesses.
Raising individual taxes reduces what economists call "discretionary or disposable income." In plain and simple terms, people have less money to spend and when people spend less, companies earn less and companies cut costs and jobs.
Raising corporate taxes (to levels proposed by those advocating socialistic agendas) will reduce innovative activity because there's no or little reward/incentive for what might be termed "internal entrepreneurship,” that is, risk-taking.
Every company, to sustain growth and profitability, must trade off short-term profits for long-term growth. They must invest in the future if they are to remain effective competitors.
An economic system comprised of income-generating private sector organizations survives and functions only if their profit margins are adequate to the demands of the future; otherwise, the organization will dwindle and become marginal.
Profits Are a Future Cost
Experienced organizations know inevitable crises and economic downturns occur. Organizations, like people, have to prepare for economic downturns, technological displacement and random/impossible to predict events.
In short, every organization needs a capital cushion to survive the unexpected.
Corporate Wealth Turns Into Societal Wealth
The field of economics is traditionally divided into two areas - namely, micro-economics and macro-economics.
Micro-economics is commonly called "the theory of the firm." Many now believe the field of strategic marketing management has, in part, displaced the traditional content of micro-economics courses.
Drucker's teachings focused heavily on the real-world dynamics of consumption, pricing, competition, innovation and the like.
Drucker believed the macro-economy is the sum total of all its micro-parts. In easy to understand terms: The better corporations perform, the better the macro-economy.
Stated differently, the sum total of corporate performance/profits equtes with societal wealth.
If politicians would concentrate more on what produces wealth they would have more money to redistribute.
Paraphrasing Drucker: "The objective is not to make the rich poorer; the objective is to make the poor richer."
The power to tax is the power to destroy. If corporations are unreasonably taxed, we can fully expect less innovation and an increasing number of organizations unable to successfully manage in a turbulent economy.
Inflation Is a Tax
Purchasing power declines with increasing price levels. People have less discretionary income after they buy the essentials. So, what's the inevitable result? They start asking for “cost of living increases.”
Yet giving increases in wages without corresponding increases in employee productivity always results in more inflation. Why?
A simple equation, formulated by C. Jackson Grayson, former pricing commissioners/czar during the Nixon administration, illustrates this notion quite well with the following formula:
| Wage Increases minus Productivity Increases = Price Increases |
For example, if wages increase by 10% and productivity increases by 3% then prices would increase by 7%.
From all the available evidence, productivity (especially knowledge worker productivity) will not keep pace with the demand for increased wages.
Just for the record: This type of inflation is called by some wage-push inflation. This differs from the type of inflation created by the government printing more money. That's called demand-pull inflation.
Simply put, many economic forecasters are expecting to be hit by both demand-pull and wage-push inflation.
They are interrelated in this situation. Both lead to decreased purchasing power and even slower economic growth.
If people have less money to spend, they buy less. And guess what happens? Companies adjust supply to meet diminished demand. Translated, unemployment goes up. An economic recovery becomes just a slogan.
In Conclusion
The next several years will be difficult for those with the awesome responsibility of surviving and thriving on the corporate battlefield
We purposely made every attempt, at the price of economic rigor, to avoid "pulling any rabbits out of the hat."
We hope you found the discussion fully self-contained and a logical step-by-step development of why we now face a slow/low/no-growth economy – characterized by rapidly rising prices, reduced business investment, weakening consumer demand and a very demoralized, embittered, and frustrated populace.
Here follows the questions you should now be able to answer:
- Define what the annual federal deficit means.
- Define what the accumulated public debt means
- Why does printing money without a corresponding increase in goods and services, lead to price increases?
- Why do many economists predict demand in many sectors will exist for products, but companies will be unable to fulfill that demand?
- Why do wage increases without corresponding productivity increases, lead to price inflation?
- What has been the result in many countries of printing too much money and increasing taxes to the point where business investment and consumer demand declines rapidly?
- What is the alternative to printing more money and raising taxes?
- From your personal perspective, what will happen to your 401(k), pension, Social Security income, and the like if too much money is printed and taxes to both corporations and individuals become exceedingly high?
