In 2003 the renowned Swiss professor Peter Bernholz published a very practical book: Monetary Regimes and Inflation. Bernholz’s most important findings:
- “The political system tends to favor an inflationary bias of currencies. All major inflations have been caused by princes or governments.” Let me make this important finding even clearer: Politicians are printing money if they are allowed to do so. No wonder — the government is the main profiteer from inflationary episodes! Inflation is nothing less than tax hikes in disguise.
- “All hyperinflations in history have occurred during the 20th century, that is in the presence of discretionary paper money regimes, with the exception of the hyperinflation during the French Revolution, when the French monetary regime, too, was based in a paper money system.” Given the abundance of hyperinflationary episodes — Bernholz discusses 29 of them — the still widespread belief in the advantage or even necessity of paper money being guarded by central bank bureaucrats is beyond insanity.
- “Monetary regimes binding the hands of rulers, politicians and governments are a necessary condition for keeping inflation at bay.” Okay, that’s how it should be. Unfortunately, in the U.S., in Europe and elsewhere there isn’t a strong enough public movement to stop the current reckless monetary and fiscal policy. Inflationists like Ben Bernanke are running amuck, without any opposition in sight! Therefore I have to conclude that “binding the hands” is next to impossible.
- “Hyperinflations are always caused by public budget deficits which are largely financed by money creation.” That’s an interesting finding, isn’t it? It makes it absolutely clear just how important fiscal policy is in the inflationary process. With budget deficits in the U.S., Japan, and most European countries totally out of control since the latest recession, this is a very strong argument for an inflationary endgame in the making. But this observation also brings up an important question: With budget deficits on the rise for many years, why hasn’t inflation become a major problem yet? There are two answers … First, we’ve already had severe inflation! During the late 1990s it came in the form of a global stock market bubble. And after that, as a real estate bubble. The second answer is taken from Bernholz’s book:
- “A continuous flow of new money into the economy leads to inflation only after a more or less extended time, if the old money is also used abroad.” Since the dollar and the euro are vastly used abroad, inflationary pressures have not yet come to fruition. But the course has clearly been set. Let me close this elaboration on inflation and government debt with one last quote:
- “A real budget deficit cannot be maintained permanently. The government must either reduce it or the inflating bad money will be substituted in time by the good money and the base of the inflation tax will be eroded.”
