Hyperinflation

[opsec]

Once the currency starts nosediving in earnest, so does business, in part because inflation starts getting booked as a false "profit". Imagine that you were a merchant, and you bought goods for $100 and sold them for $200. You've made a 100% profit! OR HAVE YOU?! If inflation is very steep, you might very well have sold at a LOSS! Because you'd have to replenish your stock at, say, $250. You're actually losing money, but on your books it "looks" like a profit! (and you are taxed accordingly!)

>CLICK!<  Ahhhh...soooooo.


Next observation:

The washerwomen of Paris, finding soap so dear that they could hardly purchase it, insisted that all the merchants who were endeavoring to save something of their little property by refusing to sell their goods for the wretched currency with which France was flooded, should be punished with death; the women of the markets and the hangers-on of the Jacobin Club called loudly for a law "to equalize the value of paper money and silver coin." It was also demanded that a tax be laid especially on the rich, to the amount of four hundred million francs, to buy bread. Marat declared loudly that the people, by hanging shopkeepers and plundering stores, could easily remove the trouble. The result was that on the 28th of February, 1793, at eight o'clock in the evening, a mob of men and women in disguise began plundering the stores and shops of Paris. At first they demanded only bread; soon they insisted on coffee and rice and sugar; at last they seized everything on which they could lay their hands--cloth, clothing, groceries and luxuries of every kind. Two hundred such places were plundered. This was endured for six hours and finally order was restored only by a grant of seven million francs to buy off the mob. The new political economy was beginning to bear, its fruits luxuriantly. A gaudy growth of it appeared at the City Hall of Paris when, in response to the complaints of the plundered merchants, Roux declared, in the midst of great applause, that "shopkeepers were only giving back to the people what they had hitherto robbed them of."

Aha! The genesis of the entitlement mentality. Seems like we keep hearing more and more of that lately. I suspect that this time around, instead of "let them eat cake", it's going to be more like "let them eat lead".

[Atash Hagmahani]

Disgusting. That's a sample of the moral decay that happens when money goes bad. 

Similar has happened in other countries too. During the "Asian Contagion", mobs of Malays in Indonesia were looting Chinese markets and mobbing Chinese minorities trying to flee the country. The Chinese merchants, just like their Parisian counterparts, tried placating the crowds by donating bags of rice. But by the time it was eagerly snatched up by the mobs, they had no idea who their benefactors were.

So the moral of the story is that mobs tend to take their misdirected frustrations out on the merchants, who did NOT cause the hyperinflation.

But it seems to be a pattern that governments blame the merchants to distract attention away from themselves. One of the Emperors of Rome, Diocletion, not only blamed the merchants for the hyperinflation that his government was causing, but decreed that charging "unjust prices" would be punishable by death, and, to prevent the merchant class from fleeing their doomed profession, also decreed that every man must follow the same occupation as his father! (imagine the poor young men who were, for whatever reason, physically incapable of performing their father's occupation! Or those who had much better prospects than their fathers, but had to do their father's work instead!)

Apparently Robert Mugabe also blamed the merchants (and "foreign interests") for Zimbabwean hyperinflation.

[opsec]

I think it's more general than that. When this phenomenon hits the shores of America, it's not going to be just the population vs. the merchants, it's going to be the have-nots vs. anybody that looks like they have more than they do. I predict that this will fall along racial lines particularly as certain minorities have decided that their problems in life emanate from whites.

[The Future]

I bet it's a translation of Bastiat's dated and somewhat understated language. Let me explain it more simply:

For a while, French factories SEEMED to be thriving, because orders were pouring in from France and all over Europe. But what was really happening was that the buyers were anticipating that the currency would collapse, so they would rather have goods than soon-to-be-worthless paper.

Once the currency starts nosediving in earnest, so does business, in part because inflation starts getting booked as a false "profit". Imagine that you were a merchant, and you bought goods for $100 and sold them for $200. You've made a 100% profit! OR HAVE YOU?! If inflation is very steep, you might very well have sold at a LOSS! Because you'd have to replenish your stock at, say, $250. You're actually losing money, but on your books it "looks" like a profit! (and you are taxed accordingly!)

When he said "limited prosperity", more likely that was an understatement (perhaps politically-motivated, to avoid offending the wrong people!) for saying widespread bankruptcy.

Another thing that does businesses in during steep inflation, is that as prices rise, consumer preferences shift. Someone in the wrong business will go bankrupt as consumers switch to more basic necessities. As a result, a lot of businesses fail during steep inflations.

Or perhaps a parallel explanation the placebo like effect of creating increasing amount of money from thin air to stimulate a feeling of prosperity and thus activity can only go so far.  If the illness if truly gone past a certain point, the placebo won't help you.  The downside to this money as a store of value phenom is that people actually start to beleive that without money a transaction can't be facilitated.  I have land, you have shovel and potato seed....we need not money to mutually benefit.

[Mike]

Imagine!  Selling for 100% profit and not being able to replace your stock!!

Generally rising prices is generally a sign of inflation.  But rising prices could be the result of shortage.
 

Lesson of 2009, if you dent the rear pumpkin cover on your truck and do not correctly identify the cause and source of the damage in late 2008 you then get to repeat the repair job in early 2010 when you back up into that rock that sticks up "just high enough". Yes,  will accept the offer of the loaned use of a small electric jackhammer and the rock will NOT be a problem again. In this process it was necessary to purchase SAE 90 gear oil to replace the spilled oil in 2008 and then the dirty oil in 2010.
Cost one quart SAE 90 in Dec 2008, $3.19.
Cost one quart SAE 90 in Jan 2010, $6.49
There is your real inflation rate 13 months 100% increase in cost. Is that hyper enough to be hyper inflation yet?
are there any substitutes?

This kind of thing should make us sit up and take notice.  I verified it.  Can I rationalize it?  Here goes:

The market for gear oil has changed.  In the past backyard mechanics would buy gear oil and use it on occaision.  Backyard mechanics are becoming rarer and gear oil is becoming less of a commodity and more of a specialty.

Other discount prices for carrots, milk, soy milk, jeans, Chinese 2-stroke motors, etc. have not shown a definite positive increase in price.

*******
cheapo used cars: People want to buy a $500 running junker and they are hard to find.  But they are out there.  And people trying to get $500 for a junker are having troubles selling them.
********
Houses:
In December '09 I met a Lit Grad Student from Portland who, summer of '09, had bought a 3 bdrm 2 bath home in Detroit for $1,500 + $600 back taxes.

The house was missing the hotwater heater, copper plumbing, electrical panel, and a few other things.  But it had a chimney and fireplace, 3bdrms & 2 bathrooms.


****

The depression has hit Oregon fairly hard, as a result of dependence on forest products.  But the pain is not spread evenlyl  While lumber mills across the state have closed, all of the mills I know of around here are still open and have taken up the slack left by the other closures.

Will America share its pain?

there seems to be a shortage of low end housing here.
http://www.rmls.com/RC2/UI/search_residential.asp


Price:    $30,000
Beds:    3
Baths:    1
County:    Umatilla
Style:    OLD-PDX,2STORY
Yr. Built:    1925
Status:    PEN
SQFT:    1084

[Atash Hagmahani]

>>Generally rising prices is generally a sign of inflation.  But rising prices could be the result of shortage.

Prices can also rise when demand for the currency falls. What causes loss of faith in the currency? A good crisis would do it!

[Mike]

Prices can also rise when demand for the currency falls. What causes loss of faith in the currency? A good crisis would do it!

Yes!
!!  in fact that is something we don't normally think about: psychology, preferences, and whims.... that might have nothing to do with money supply. 

Cool idea.

[opsec]

I wonder if other nations have done the math and perceive Obamacare as a crisis.

Prices can also rise when demand for the currency falls. What causes loss of faith in the currency? A good crisis would do it!

I wonder if other nations (China) have done the math and perceive Obamacare as a crisis.

[Mike]

I wonder if other nations (China) have done the math and perceive Obamacare as a crisis.

Yes.. 

I went to bed wondering if I were a frog..  I mean, "Is living in this country getting to be untenable?  Am I being boiled alive?  I don't want health insurance.  I don't need another ID card."

I just woke up wondering how the stock market is doing?

http://finance.yahoo.com/intlindices?e=asia

[Atash Hagmahani]

The bond market might be even more interesting. It's rigged too, but bond investors a savvier bunch, overall, than stock market investors:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYUeBnitz7nU

[opsec]

I went to bed wondering if I were a frog..  I mean, "Is living in this country getting to be untenable?

You mean to tell me that you still have some remaining doubt about this?

[Mike]

From earlier in this thread:

If inflation is very steep, you might very well have sold at a LOSS! Because you'd have to replenish your stock at, say, $250. You're actually losing money, but on your books it "looks" like a profit! (and you are taxed accordingly!)

http://wallstreetexaminer.com/podcasts/rf021611pv.mp3
The link is the most recent Lee Adler & Russ Winter MP3.  Russ Winter has been following China.  According to Russ, following the Chinese New Year many workers didn't want to return to work.  So manufacturers are being squeezed by higher labor costs and higher raw material costs. 

When Chinese manufacturers tried to pass these costs on to American distributors, orders were cancelled.  According to this MP3, shipping contracts are being voided.

In short, Russ Winter doesn't buy the "China Dynamo" story.

[Atash Hagmahani]

Good to see you, Bud. 

Have you been following stories of rising Chinese prices? The workers are being squeezed. My guess is that there is so much oversupply of manufacturing that the owners have no pricing power. But you can't just manufacture more food and energy.

[Mike]

Have you been following stories of rising Chinese prices? The workers are being squeezed. My guess is that there is so much oversupply of manufacturing that the owners have no pricing power. But you can't just manufacture more food and energy.

Yes!  The workers are being squeezed by low pay & high food prices.

Russ Winter has made the claim that chinese factory owners are also getting squeezed.... in other ways...

http://seekingalpha.com/article/252599-as-chinese-exporters-go-down-western-importers-are-ambushed

....the annual pre-New Year rush has been nothing like that of recent years, causing shipping lines to reverse rate increases and cancel sailings they introduced last summer as the American economy improved. This winter, the scurrying started only two weeks before the holidays, instead of the usual four weeks, according to shipping executives. That is because many Chinese factories simply cut back production this month as their Western customers began resisting steep price increases."