This blog post examines the economic fallout caused by inflation and capitalism’s inherent fate of leading to deflation and financial crises.
You can’t print money indefinitely
Banks increase the money supply through lending, and central banks print money for various reasons. But does the world really run smoothly without any issues? Isn’t it good that more money is circulating, allowing people to spend more? Let’s hear from Professor Jeffrey Myron of Harvard University’s Economics Department.
“When the government increases the number of banknotes and the money supply grows, the value of each banknote decreases. This is because each individual banknote becomes less scarce. You can buy less with the same amount of money, leading to inflation. The goods and services you can purchase per dollar diminish. Therefore, when the government injects money into the economy, inflation follows.”
An increase in the money supply causes prices to rise, and inflation follows. Under the capitalist system, as long as there are ‘banks’ and a ‘central bank’, inflation is an inescapable, fatal phenomenon.
The dangers of such inflation can drive a nation’s economy into the worst possible state. In 2008, Zimbabwe in Africa experienced hyperinflation as price increases spiraled beyond the state’s control. It recorded an unimaginable annual inflation rate of up to 231 million percent. The cause was the misguided policies of President Mugabe, who ruled for over 40 years. In an attempt to overcome extreme unemployment and repay foreign debt, he printed far too much currency, leading to this hyperinflationary state. The 100 trillion Zimbabwean dollar note, with 14 zeros, vividly illustrates just how record-breaking the inflation was at the time. It’s said that the price of a meal could even change between the time you ordered it and when you finished eating.
Such hyperinflation had also occurred in Germany during the 1920s. After World War I ended, the Treaty of Versailles was signed between the Allied Powers and the defeated Germany. At this time, the Allies demanded enormous reparations from Germany. The following are some of the treaty’s provisions.
“Germany shall pay reparations to the Allied Powers amounting to 2 billion marks annually, totaling 132 billion marks, and shall pay 26% of its annual exports. Should Germany fail to make these payments within the stipulated period, the Allied Powers may impose sanctions by militarily occupying the Ruhr region, Germany’s key industrial area.”
However, Germany, the defeated nation that had poured vast sums into the war only to ultimately lose, simply did not possess such an enormous amount of money. Consequently, Germany had no choice but to drastically increase the amount of currency issued through its central bank and began issuing government bonds to sell abroad at rock-bottom prices. As a result, something truly unimaginable occurred. By July 1923, prices in Germany had surged over 7,500 times compared to a year earlier. Two months later, they soared 240,000 times, and three months after that, they skyrocketed 7.5 billion times. The exchange rate reached as high as 4.2 trillion marks per dollar. Germans could only get one dollar when they carried 4.2 trillion marks. They had to buy goods immediately upon receiving their wages and could not even consider saving.
Of course, Germany’s hyperinflation occurred under the unique circumstances of defeat in war, but it serves as a stark example of what happens when a state increases the money supply without limit.
After the boom comes the bust
Even without such extreme cases, inflation and deflation continuously cycle in capitalist societies. Russian economist Nikolai Kondratiev discovered in 1925 that long-term cyclical patterns exist within capitalist economic environments, creating crises. He concluded these cycles repeat every 48 to 60 years. Schumpeter, one of the most prominent economists of this century, similarly argued that the capitalist economy rises and falls like waves, naming this phenomenon the ‘Kondratiev Wave’.
The reason inflation and deflation periodically repeat, as mentioned earlier, is the continuous expansion of the money supply. In the process of increasing the money supply through lending, banks initially prioritize loans to creditworthy individuals. However, as the pool of eligible borrowers shrinks, they eventually lend to those without the ability to repay. Thus, the money supply in circulation ceaselessly grows, increasing the amount of money people have available to spend. Moreover, people come to believe this situation will persist. Consequently, they increasingly spend money on consumption rather than productive activities. With more money available, they buy expensive clothes, purchase nice homes, and upgrade their cars. Ultimately, they reach a point where they can no longer afford to repay their debts. Let’s hear from Professor Jeffrey Myron.
“I believe American consumers and many consumers in other countries became overly optimistic. They began consuming more, borrowing more money, and saving less. They didn’t believe risks existed and failed to take appropriate measures to protect themselves from danger. Eventually, they reached a point where it was unsustainable, and only then did they realize they had been too optimistic. And suddenly, it all collapsed.”
Greece and European nations also spent far too much money, ultimately facing a financial crisis. Let’s continue listening to Professor Jeffrey Myron.
“The economies of Europe and the United States are, in major respects, very similar overall. Europe has programs promising generous retirement pensions and healthcare costs. The math shows those promises cannot be kept. Even with very strong economic growth. Even under the highly optimistic assumption that the economy grows 3% annually, spending continues to rise, far exceeding the ability to pay. Greece’s critical problem was that it could borrow money at very low interest rates, and consequently, it used that borrowed money not for productive investment. It was spent on consumption, not on areas like schools or institutional research and development that could enable rapid economic growth. It generated absolutely no future income. Consequently, they kept borrowing excessively until they reached a point where repayment became impossible forever.”
Inflation, where prices rise due to a rapid increase in the money supply, is followed by ‘deflation,’ where everything shrinks drastically. It’s similar to a balloon that keeps growing until it finally bursts and shrinks back down. Recognizing the gravity of the situation, the government puts the brakes on money supply growth, and people, caught in anxiety and confusion, reduce their spending. As consumption (demand) shrinks, supply also decreases, causing business activity to contract. In short, the economy, which had been racing ahead unchecked, suddenly hits the brakes, plunging everything into a situation on the brink of collapse.
The problem is that once this deflation begins, money stops circulating. Companies start cutting production, investment, and jobs simultaneously, pushing ordinary people to the brink. So, what about now, after the 2008 U.S. financial crisis? Let’s hear from Ellen Brown, President of the Public Bank Institute.
“Global credit has collapsed. We’re still in deflation. There isn’t enough money. Look at the European Union. Many countries are drowning in debt. That’s precisely because there isn’t enough money to pay back the debt and interest.”
Deflation following inflation is almost inevitable. This is because the prosperity enjoyed until now was built not on real money, but on debt. Money continues to increase, but it is not money earned through labor. Money begets money, and that money begets more money. Thus, the capitalist economy follows its predetermined path toward inflation. When it reaches its peak, it inevitably encounters the despair of deflation. This is the undeniable ‘fate’ inherent in capitalism.
