We are constantly being bombarded by fear mongers about the likelihood of hyperinflation in the US economy because of what is considered to be the irresponsible use of monetary policy, chiefly in the form of Quantitative Easing (QE) that might or might not be working. Monetary policy is not producing the desired linear modulation of economic output, and I’ve demonstrated why this is true. But, I’m not the tiniest bit worried about hyperinflation. It’s a fairy tale composed by those who don’t understand the psychological and philosophical basis of money. Hyperinflation is not really inflation at all. Rather, it’s the sudden and exponential loss of Monetary Obedience to the currency.
There won’t be any hyperinflation unless we lose Monetary Obedience and there’s not much chance of that happening any time soon. Monetary Obedience is the term I have coined to explain that delicate equilibrium established among market participants at which their need for conducting the ordinary monetary exchanges of life counteracts the otherwise human need to nullify an irrational concept. Because, indeed, fiat money is exactly that, an irrational concept. Still, we’re nowhere near the point of equilibrium that the Weimar Republic experienced.
If hyperinflation were possible in the US, we’d have already experienced it, because the dollar has long been worthless.
Pull out a USD bill of any denomination and place it before you. Look at it and ponder its worth. It has no conventional value whatsoever. The only reason it has value is because you are commanded to accept it, and given the opportunity to demand that it also be accepted as legal tender for debts incurred in the US. Monetary Obedience derives from the power of the US to command that acceptance.
The hyperinflation fear mongers often point to the Weimar Republic’s collapse after WWI, when wheelbarrow-full loads of old marks were needed to exchange the massively deflated currency for just one new mark. But that wasn’t because of the acceleration of prices of goods and services in terms of the equivalent labour of exchange for obtaining these goods and services, but rather because the German government no longer had the power to enforce monetary obedience to the mark.
The fiat money used in modern societies is not money at all, but rather a force, a facilitating force controlled by the central bank. Urban, labour-specialised modern culture could not function economically otherwise.
Let me illustrate in this manner. Assume that a giant and wonderful event that produced all the elements of a bazaar will be held in a sort of open-air stadium with row after row of seats and stalls extending into infinity, such that no person attending the event could avoid exchanging goods or services with other attendees. However, persons not attending would have no opportunity to exchange their goods or services at all.
In order to attend the event, attendees must bring value for the purpose of exchange, either 1) – as mechanical or intellectual labour, or 2) – as commodities, finished or unfinished goods. These items of intellectual or tangible value they will bring in whatever quantity and quality they are capable of producing.
However, one additional requirement must be met before attendees are allowed through the entrance gate to the bazaar. They must have a small black marble both to enter and also that must be shown in any exchange made, regardless of the type of exchange. It doesn’t have to be exchanged itself, but must in all cases be shown by both (or all) parties conducting any exchanges of value.
The black marble has nothing to do with the exchanges of value. These are ultimately conducted in the core basis of all money, and that core basis is labour, intellectual or mechanical. From that labour all items of value are produced, all goods and services of every sort. In this sense the black marble is inert. However, it must be shown at every exchange, and in that sense it is a facilitating force.
Fiat currency is that black marble. Likewise, it is merely a facilitating force and is entirely inert in regards to the exchanging of all values which are instead conducted in terms of the pricing of labour, whether intellectual or mechanical. Possessing the black marble only permits the exchanges and has nothing to do with their values. Monetary obedience occurs at the bazaar because the attendees obey the requirement to show and present the black marble.
Because of this obedience, all values of exchanges are eventually conducted, like in human language, in a parent tongue of familiarity, that being in terms of the black marble, even though market participants subconsciously understand all values derive from the pricing of labour.
If ever an event or chain of events causes the loss of monetary obedience to the black marble, then it is as though the language of an entire society could be forgotten in an instant, destroying the familiar mechanism in which the ultimate values of exchanges are priced, in terms of what is the core basis of all money, intellectual or mechanical labour. When no mechanism exists to facilitate that pricing, the bazaar is reduced to pandemonium as participants frightfully search for some new facilitating force to replace it.
The United States is probably at the peak of its power and influence (debating the point is not my purpose here). It has the power to enforce monetary obedience of the black marble, and it isn’t at risk of losing it any time soon. Fiat currency is simply an inert facilitating element of economic exchange and has nothing to do with its pricing.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.