What do Peter Schiff, gold bugs, the financial media and many bitcoiners have in common? It is the shared belief that “money printing” is to blame for many, if not all, of the increases in price that plague our economy. While it cannot be argued that prices are increasing in certain areas such as in housing, stocks, bonds and lumber (albeit temporarily), I believe the source of those price increases comes from a different place than what most people tend to assume.
Over the past few months, I have been collecting information related to the topic of inflation and would like to use this opportunity to share my findings with the Bitcoin audience in particular. We will use this missive to try and identify the types of things one would expect to see in both inflationary as well as disinflationary/deflationary environments. We will also try to uncover some of the culprits that are most responsible for the increase in asset and consumer prices post–Global Financial Crisis (GFC).
Within the Bitcoin space, there are two topics that are guaranteed to get you positive attention. One is to promote the inflation narrative and the other is to promote bullish price momentum. Many of the articles that cover the aforementioned topics can be boiled down to mere cheerleading and often tend to lack substance in my opinion. Even though this missive will be covering the topic of inflation, it will actually be providing support for an alternative view than that which is most popular. This article may seem a bit long to most readers but not to worry, it is just as chart heavy as it is word heavy and the charts and illustrations we will be using will be helpful for our analysis.
In order to begin, we first need to identify the attributes of both inflationary and deflationary environments in terms of the social and economic behaviors that one might expect to observe in each type of environment. To do this, we will be utilizing historic precedent more often than not. We will begin our analysis by first identifying the attributes of a truly inflationary environment.
What Does An Inflationary Environment Look Like?
In order to understand what to expect in an inflationary environment, we will be using history as our guide. We will be looking at the effects that inflationary periods have had on areas such as interest rates and consumer behavior. The inflationary episodes below are presented in chronological order and essentially cover the last century or so. We begin with Bolshevik Russia.
“World War I and the Revolution of 1917 led to a period of unprecedented inflation. By 1917, the ruble had lost 75% of its 1913 exchange value; by 1920, it had lost 99.9% of its 1913 foreign-exchange value. The commodity price index rose 5800% between 1913 and 1918 and rose 4.9 million% between 1913 and 1921.”— “A History of Interest Rates,” p. 598
One of the important hyperinflationary episodes that has been largely forgotten was the Soviet hyperinflation that directly followed the Bolshevik Revolution. The example provided above might remind people of more modern episodes such as the experiences of both Zimbabwe and Venezuela. So we know what was happening to the Soviet ruble during this time, but how did interest rates respond? According to”A History of Interest Rates,” deposit rates at the Gosbank were as high as 72% in 1923, but the text also indicates that these rates were not indicative of supply and demand, instead being determined by Soviet commissars, and thus would have likely been much higher. On the lending side, interest paid on loans exceeded 216% during the same year. Additionally, pawn shops could charge upto 120% for advances of credit. The aforementioned Soviet commissars controlled all aspects of banking during this period, so black market rates were likely to be much higher than those stated above.
“The only thing to do with cash by that time (February 1922) was to turn it into something else as quickly as possible. To save was folly. Undoubtedly, however, as in Austria, there were many farmers who behaved outrageously. Dr. Schacht’s account of the inflationary years recalled that farmers ‘used their paper marks to purchase as quickly as possible all kinds of useful machinery and furniture-and many useless things as well. That was the period in which grand and upright pianos were to be found in the most unmusical households.”— ”When Money Dies,” p. 109
From a behavioral point of view, one of the things you would expect to see during a period of high to extreme inflation is for consumers to try and get rid of their rapidly depreciating currency as quickly as possible. During the years immediately following WWI, this is exactly what you saw in Germany. Consumers would rush to purchase whatever they could the moment they were paid. In fact, the situation got so bad that producers and retailers couldn’t, and didn’t want to, part with their wares and responded by limiting the number of hours that their doors were open otherwise their inventory would be quickly cleaned out and the shopkeepers would have been stuck with the rapidly depreciating German mark. Additionally, loans in excess of…