On the Road to Hyperinflation??? Transcript of workshop presentation by Leonard Melman at Cambridge House Resource Conference, Calgary, Alberta, April 5, 2009. Thanks very much.  As you can see; the topic is "On the Road to Hyperinflation???" and I think the best place to start out is by defining just what we are talking about.  A lot of people think inflation is only visibly rising prices.  However, the classic economic definition of "inflation" is an increase in the amount of money in circulation and, as we will note, there is no question that is presently occurring.  An "inflationist" is someone who advocates an increase in the money supply and our key definition is "hyperinflation" which refers to 'inflation which is out of control.' We have had inflations in the past; 1973-4 was a good example as was 1979-81, but they remained relatively in control.  Unfortunately, when "hyperinflation" occurs, inflation goes out of control.  (Previous speaker) John just gave an excellent example with Zimbabwe where you recently had to spend billions of Zimbabwean dollars to buy a loaf of bread, if you can find one.  What are some of the consequences of hyperinflation?  They include the loss of value of stored monetary assets.  If you save for a lifetime and accumulate $500,000 and then, suddenly, in a matter of months, that $500,000 won't buy a postage stamp, you are wiped out.  You have no stored monetary assets of real value whatsoever. Second, commerce and industry cannot plan for their activities in a rational, orderly manner to produce their goods and services we need when they cannot reliably measure currency values.  Third, you have chaos in all marketplaces because there are no reliable pricing mechanisms.  In Zimbabwe today, there are virtually no goods on store shelves because merchants have no way to know how much to pay for stock and nobody knows how to price merchandise, because the measurement of money keeps changing.  And then, finally, we see such conditions lead to social unrest and turmoil and, to my way of thinking, those are among the worst consequences of hyperinflation. There have been quite a few hyperinflations in the historic past, but the four I have chosen to concentrate on are: * - The Roman Empire in the fourth and fifth centuries A.D., * - Monetary inflation in France in the late eighteenth century, * - Perhaps the most famous of all, Germany in 1922-3 * - Zimbabwe in the present era. One of the most fascinating things to me, and I love Roman History, is the fact that it parallels so much of what is happening in America today, and the Roman Empire collapsed almost directly as a result of hyperinflation.  Of great concern, Rome reached the stage of hyperinflation for many of the same reasons that we are seeing around the world lately.  They spent a great deal of money on their military which held the Empire together; on their public works such as Roman highways and aqueducts; and what they always spent money on were called "bread and circuses".  It is not a well-known fact that the mass of many low-income level Romans didn't work.  Some were artisans, but most didn't work at all.  They would get a bread allotment and have games and circuses put on, and that is how they would spend much of their time, Well, those games had to be paid for and they were paid for by the state.  What the state finally did, since they did not have sufficient true gold and silver coinage, they started to artificially inflate the currency by beginning to mix alloys in with the pure gold and silver and debase the currency.  After about one century, people began to distrust the currency because they had no idea whether it was gold, lead, copper, or zinc in various combinations.  Of course the government blamed growing difficulties on the greed of merchants and we eventually saw rising taxes, price controls and punishments for those who would not accept the currencies issued by the Emperors.  This led eventually to disillusionment of the society and the triumph of the Huns over Rome.  One point of interest when comparing the Roman situation 1,600 years ago to America today is Rome was the dominant power in the world.  When Rome fell, the balance of the world was so disturbed that a centuries-long period followed which had a particular name, called "The Dark Ages".  In France we had a different situation.  The French Revolution began in 1789 and very soon, commerce was disrupted, people were reluctant to spend money and the economy slowed down.  The leaders of the day decided one of the ways to bring commerce back was to create new currency and they called the original issuance of the new money "Assignats" and circulated new notes in the amount of 400,000,000 Assignats and instructed that the new notes would have the same monetary value as gold (or "specie") coinage.  For a while, this issuance of Assignats did bring about some increase in economic activity, so they said, in effect, "why stop at 400,000,000?" and they issued another 1.2 billion.  In order to further stimulate economic activity, further additional amounts were issued, but the more that were outstanding, the less people valued them.  Then, just as like Rome centuries earlier, if anyone demanded payment in pure gold, they were facing punishments, up to and including the guillotine if they failed to accept Assignats at face value.  Eventually the Assignats descended toward worthlessness once 40 billion of them were outstanding.  This created so much social disorder in France that it paved the way for the advent of a dictator.  To the world's good fortune, that happened to be a relatively benevolent character by the name of Napoleon Bonaparte and so France was able to restore order and commerce. But the world wasn't so lucky a little more than one century later as we look to the German hyperinflation of 1922-3, which had its foundation in events surrounding and following World War One.  The expenditures to fund their massive armies became too large for Germany to raise just by the issuance of currency backed by gold and they began to print money to finance the war.  This was compounded dramatically by the passage of the Treaty of Versailles when Germany had to repay billions of Marks in reparation payments to the victorious Allies.  Since the German government did not have adequate funds on hand, they began to print more money for that purpose as well. Germany was able to hold price structure together until late 1921, early 1922 and then strange things began to happen.  With acceleration of currency creation, prices began to soar.  By late 1922, signs of true hyperinflation had begun to appear and by early 1923, menus and factory price lists began to be re-issued first weekly, then daily.  They actually had factories where several people were assigned to the task of re-issuing price lists several times per day and government printing presses began to run full time.  In many cases, it took truck-loads of paper money to pay workers, who then had to rush out and spend their money before if depreciated further in value.  Everything relating to monetary value was dramatically disrupted.  I want to relate a very quick personal experience about how I became aware of the German hyperinflation at an early age.  While growing up in Winnipeg, one of my uncles decided I might become interested in stamp collecting and gave me a present of a "grab bag" of about 5,000 world stamps along with a rather large stamp album.  I then sorted the 5,000 stamps into countries and when I got to Germany, I noticed a very astonishing thing.  Beginning in 1921, prices on their postage stamps began to rise.  Starting from about one Mark, I noticed that the price notation on the stamps rose to 5 Marks, then 10 Marks, 50 Marks, 100 Marks, 1,000 Marks and ever-higher amounts.  Eventually, they over-printed the thousands of Marks with ever-increasing numbers of millions of Marks - just to mail a single letter.  I still have in my possession stamps denominated "One Milliarden Marks (German for 'billion') and "Ten Milliarden Marks".  I remember as a kid wondering how anything could cost such vast sums, and my uncle gave me a rudimentary explanation about German hyperinflation.  Finally, the time came when the whole monetary system broke down.  Germany abandoned their old Mark and issued a new currency, the "Rentenmark".  Obviously, all the savings of a lifetime among the Middle Class, which had been denominated in the old Mark, were wiped out; their expectation of security in their old age vanished as did their faith in the ability of the Democratic government of the moment, the Weimar Republic, to manage the country's affairs.  This opened the door to political turmoil and a young gentleman by the name of Adolph Hitler took advantage of the situation by promising that his Nazi Party would provide stable government and sound currency values.  The world eventually paid with 60,000,000 lives for that fiasco which was due in large measure to the advent of hyperinflation in Germany.  It was a sad lesson. Today, we have hyperinflation in Zimbabwe.  It has accelerated so fast that in each of the past two years we have seen reprinting and over-printing of the Zimbabwean currency.  However, it was not always so.  During the Smith administration, the Zimbabwean Dollar was actually worth $1.57 and that country produced goods which they marketed to the rest of the world to earn real wealth.  Unfortunately, by the time Mugabe's land reform programs began to be imposed, efficient production went downhill, the country became reliant on foreign borrowing and they had to inflate the currency to continue purchasing food and other essentials.  The unlimited creation of currency subsequently led directly to hyperinflation.  By one year ago, the Z$ had descended from $1.57 to one trillion Z$ for each US$.  So what the Zimbabweans did was cancel the old currency; print a new one and begin the process once again.  The new currency then rapidly descended again into hyperinflation and finally in January of this year, Zimbabwe decided to conduct business solely in foreign currencies such as the U.S. Dollar and the South African Rand. The Zimbabwean dollar-creation experiment left behind market chaos, empty store shelves, destroyed monetary values, rising disease and political instability in its wake and if it had not been for the charity of the rest of the world, many Zimbabweans would have starved to death. As we can see from these examples, the effects of hyperinflation are devastating at best and deadly at worst. So, what leads to hyperinflation?  Perhaps one answer might be ignorance of monetary history among the general public. It is important is that our education system utterly fails to teach our young people monetary information so they can learn about such things as hyperinflation, currencies of value versus non-value as well as the history of currencies which have had gold or silver backing versus those which have not.  Another concept which leads to potential hyperinflation is a growing lack of confidence in government brought about by a sudden shock such as the Versailles Treaty, the breakdown of society in Zimbabwe or the French Revolution and its destruction of the existing social order. Whatever it might be, something creates rising disillusionment, and that is vital because the only thing that supports fiat currencies is faith in government and faith in the social order.  There is nothing else.  Such money is simply a matter of taking a piece of paper, slapping ink on it and saying "This has value in the marketplace."  As long as the confidence in the underlying government is maintained, you can take it to your local merchant and buy cars, appliances, food or other desirable items.  But the currency, in and of itself, has no value other than that which is attributed to it via confidence in the reliability of the underlying or issuing government. But how many children do we know, say anyone from age 12 to 20, who can conduct a rational conversation regarding the history of money?  One concept that would be so easy to teach children, if our teachers were so inclined, would be to present the following question in the form of a wager:  "Think of making a bet where in one case, you would have a 100% absolute certainty of success versus one where you would have an absolute 100% certainty of failure.  Which would you choose?" I am referring to the fact that in all of history, no currency of gold has ever become worthless, not one, ever.  We have heard of the recovery of treasure ships sunk in the Caribbean centuries ago and the gold coins recovered from such a ship, perhaps 400 years after it sunk, would still retain their value in gold in addition to their collector's premium.  If the same ship carried paper notes issued by the Spanish government of that era, they would be worthless as money, aside from their collector's premium.  Currencies of gold have never failed to retain value.  Paper currencies have never failed to approach worthlessness over time. Unfortunately, our children never hear of such things from our professional educators. Let's go to America.  America's monetary history is very simple.  Until 1933, with only two exceptions, their entire monetary history was of a currency backed by gold and silver, fully convertible into metal from paper and vice versa.  The two exceptions were the Continental currency to finance the Revolutionary War and the Greenback to finance the Civil War.  By the time the Revolutionary War was over, inflation was so bad that the expression "Not worth a Continental!" was commonplace.  One of the new Constitution's first functions was to establish precious metals as the required currency of the land - a provision which American governments in recent decades have utterly ignored.  After the Civil War was over in 1865, one of the American government's first acts was to retire the fiat Greenbacks which had been used to finance much of the conflict.  The government, acting with utmost responsibility, then issued valid convertible currency in their place, and the Greenback was finished.  Until 1933 there was relative price stability in their economic society.  Very few people (again, lack of education-LMM) know that for that 144 year period from 1789 through 1933, there was almost no inflation as there was a natural order to things.  The amount of new gold and silver discovered and produced grew at virtually the same rate as the expansion of goods and services created by the economy.  There were variations, but since economic productivity was growing at about the same rate as the money supply, you had relative price stability over time. A person could put aside money in 1830 and have virtual certainty that when he was ready to retire in 1870, that money would likely have the same purchasing power as when he first saved it.  Can we imagine that in our lives today?  What happened during the last century was a great transformation in the American government.  If any of you have the inclination, I would like you to go to your computers when you have a chance and "Google" the Inaugural Address of Grover Cleveland, 1893.  I believe it is one of the finest - and last - presentations by an incoming President relating to a truly free, limited government society.  He noted maintaining stable currency values was vital via gold and silver, he said Paternalism would lead to great troubles and he spoke of economy in government as being of vital importance.  A newer style of government came into view with the administration of Woodrow Wilson in 1913.  The desire to have government create a utopia overtook policy-makers and by the time FRD came into office in 1933, many of the things he wanted to do, particularly those actions he believed would alleviate the Depression, could not be financed unless he could create currency at a greater rate than that which was imposed by the quantity of gold and silver.  And so, he took the action of outlawing gold and silver backing from the domestic U.S. Dollar, and also outlawed the private holdings of gold for monetary purposes. The U.S. Dollar remained convertible for foreign holders, but following WWII, the drain on the U.S. gold reserves became acute as foreign dollar holders continued to convert paper currency into gold.  President Nixon finally outlawed all convertibility for both domestic and foreign holders in 1973.    Under gold and silver, America had price stability, unparalleled growth and prosperity, and most importantly, especially in relation to the world of today, limited growth in the supply of gold and silver imposed limitations on the growth of government.  Since 1933, and particularly since 1971, we have seen paper become supreme, we have seen explosive growth in government, we have seen huge build-ups in the money supply, and we have seen dramatic changes in the thinking of individuals from living a life of paid assets toward living a life of indebtedness.  In addition, we have been experiencing periods of rising consumer price inflation on several occasions, particularly in the early and late 1970s. When we look at the rate of growth in the money supply figures for America, the numbers are astonishing.  The widest category of America's money supply calculations was called M-3, but that data series was officially discontinued by the U.S. government in 2006, but has been reliably reproduced by private economists since.  In 1981, the first year of Ronald Reagan's presidency, that number stood at US$1.5 trillion.  By 2006, it was already US$12 trillion, and it is now estimated to be near $15 trillion.  In other words, what took almost 200 years to accumulate has been multiplied about ten times over in just one generation! Another way of measuring U.S. money requirements is to note the growth in U.S. government debt.  After taking nearly two hundred years to reach the $1 trillion level, it has multiplied many times over and the rate of growth in recent weeks is horrendous.  According to the "U.S. National Debt Clock", the figure has soared from US$10.6 trillion on January 28 of this year to US$11.1 trillion as of this date (April 5, 2009).  This means that in nine weeks, one-half trillion dollars has been added to the American national debt.  In my opinion, that's not discipline, that's craziness.  I originally prepared this presentation for the Cambridge House Vancouver gathering in January of this year, and you can already see substantial differences with today.  The national debt at that time was US$10.6 trillion and the budgetary deficit for 2009 was predicted to be US$400 billion.  However, by early January that number was raised to US$1.2 trillion and it is now expected to be near US$2 trillion or more.  Most importantly, we can't look at a newspaper, watch a televised political address or learn of a release from America's federal government without hearing about some new rescue program, bailout or stimulative expenditure.  I cannot keep track of all of them, they are coming so fast - but just recently we have been told about $1 trillion for the IMF to spread around the world; the purchase by the Federal Reserve of U.S. government debt to the tune of about $1.1 trillion; $170 billion to AIG; $70 billion (or so) to the auto giants; Troubles Asset Relief Program (TARP) in almost uncountable amounts; and, in addition, the number of activities the government wants to finance such as infrastructure, health, education, welfare, regulation, job creation, etc. is almost incredible. So, what is the condition of the United States, even including all the recent stimulative activities?  It is steadily worsening.  Unemployment in January was 7.2% and it is now 8.5 percent.  Bank stock quotes have fallen even further than during the Great Depression and values in personal asset accounts are likewise collapsing.  Many people's retirement programs have been literally crushed and shopping centers are now seeing vacancies in steadily-growing numbers.  Home values continue to fall and foreclosures are still rising. All of this is leading to growing demands for the government to "DO SOMETHING" while states such as California and New York are going broke.  Demands are rising to rebuild the infrastructure, to buy out failed assets and to lessen the pain for millions of homeowners.  I have printed Barak Obama's Inaugural Address and it is startling to see what he is promising.  Included in his promised programs are those devoted to create jobs; rebuild the infrastructure; create or insure medical services for everyone; revamp the education system; provide for stable retirement for everyone - and the list goes on.  It is difficult to locate any important area of social life where glowing promises of government assistance have not been made. One fear I have is that expectations have been built so high that there may be social consequences if these 'rewards' cannot be provided as pledged.  As it relates to our theme of potential hyperinflation, looking ahead we see enormous, escalating expenditures to honor those pledges, resulting in continued annual budgetary deficits of $2 trillion or more and money supply growth out of control.  We also see the American national debt growing rapidly toward 15 or 16 trillion dollars within the next couple of years. When we put all of this together, the great question is:  "Will confidence in the government's ability to manage the economic society break?" It is my personal belief that there is every chance it will and I believe we are already seeing the first chinks in the Obama Administration's armor.  Many people are looking at the array of programs already proposed and they are beginning to ask 'what on earth is going on?'  They see $785 for stimulus, buying out every failed asset from banks, and other programs in a multitude of directions.  Where is the money to come from?  If there is a breakdown in confidence in the government-backed economic and monetary systems, combined with the magnitude of government actions, combined with the monetary inflation already 'baked into the pie', I believe the answer to the question of whether we will indeed see hyperinflation is that the possibilities are really growing. Two years ago, we might have said a one percent chance.  Last year we might have offered a three or four percent chance.  Now, I believe there may be a fifteen to twenty percent chance that we could see a genuine breakdown in public confidence regarding the ability of the U.S. government to control its finances, and such a breakdown has been a key ingredient of past hyperinflations. If so, gold and silver could become refuges for millions.  However, in terms of profiting from an upward move in these precious metals, I want to make a distinction.  If gold and silver merely respond to actual visible price inflation; one's total worth would likely stand still in terms of purchasing power.  However, if we see a rally in gold which reflects a rising fear of potential future hyperinflation that is independent of actual visible price inflation, then I think gold and silver could be lifelines to increase the purchasing power of  your actual assets, even in times of crisis. Therefore, it is my belief that an investor should hold some physical gold and silver and, in addition, look for purchasing quality gold and silver mining shares because they can provide valuable leverage.  I would offer this disclaimer that one should consult with his or her registered investment professional before making any actual investment decisions. And, of course, one of the ways available to gain current background information is to read the "Melman Minutes" and other portions of my website, "The Melman Report", which can be accessed at www.themelmanreport.com.  The "Melman Minutes" are currently posted each Monday, Wednesday and Friday, unless unique scheduling requirements occur.  Once my forthcoming book on the growing economic crisis is completed, I will return to an every-business-day posting schedule. "Thank you for your attention."
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