Will higher prices disarm Russia? It is complicated…
The annual rate of consumer price inflation in Russia was 9% in February and 17% in March. For producer prices, the March figure was 27%. Is Russia heading for hyperinflation, with prices rising at triple digit rates or more? I don’t know, but it’s good to remember what happens during hyperinflations.
Many people believe that higher prices make everyone worse off. It’s not true. Buyers pay more, but sellers receive more. One person’s higher price is another’s higher income. If all prices and all incomes increased by the same amount – say 10% – everyone’s inflation-adjusted real income would remain unchanged. The true costs of inflation are more subtle.
In practice, within each inflation, some prices increase more than others. Some people win while others lose. The most recent Great Inflation in the United States was in the 1970s. In 1973, the consumer price index rose 9% while farm income rose 31%, transferring income to farmers across the rest of the country. The huge increase in oil prices in 1973-74 and 1979-80 transferred hundreds of billions of dollars from the United States to oil-exporting countries. Most complaints about inflation were misdirected. The pain felt by many was not due to inflation, but relative price changes in favor of farmers and oil owners who had no reason to complain.
Inflation also reduces the real value of debts, a depreciation that benefits debtors and harms creditors. When there was inflation during the Civil War, William McCormick wrote to his brother in England that “the creditors were seen fleeing their debtors, and their debtors pursued them in triumph and paid them without pity”. When William Jennings Bryan campaigned for president in 1896, he promised inflation that would make it easier for farmers to pay off their mortgages. In the 1930s, Franklin Roosevelt promised inflation for similar reasons. In a radio address printed on the front page of the New York Times the next day, he argued that the recent price drop should be reversed:
I repeat what I have said many times, that since last March the definite policy of the government has been to restore the level of commodity prices… to make possible the payment of public and private debts closer to the level price at which they were incurred.
FDR was a shrewd and successful politician who promised inflation!
Inflation has another, even more subtle cost. When prices are rising rapidly, the hot potato you don’t want to get caught up in is money. You don’t want money hidden under a mattress, buried in the back yard, or sitting idly in a checking account paying little or no interest. You want to buy things like coffee, tomatoes, and toothpaste before their prices go up even higher (a buying rush that drives prices up even faster). Any remaining funds can be temporarily invested in appreciating assets and then withdrawn when needed.
When the United States experienced double-digit inflation and double-digit interest rates in the late 1970s, many people spent many hours trying to minimize the minutes they spent holding cash. , whether at home, in their business or in their current account. Before the Internet, they went to banks daily, shuffling funds between savings accounts that paid interest and checking accounts that didn’t. Companies have invested billions of dollars in day-to-day and even hourly loans.
People spending their precious time and energy trying to minimize their cash holdings represent a very real social cost that economists call the “shoe leather cost” of inflation.
During hyperinflations, shoe leather prices become absurd. A good example is the German hyperinflation in 1922-23. After World War I, the victorious Allies demanded extensive reparations from Germany. In January 1923, French and Belgian troops occupied the Ruhr district, claiming that Germany was behind in its payments. The German government called a general strike and printed hundreds of billions of marks to pay the strikers. The inflation rate has reached 322% per month!
The Germans who were still working were paid several times a day. Their children would ride their bikes to the factory gates to collect those wages, then furiously return to town to spend the money as quickly as possible. Businessmen traveling through Germany had to borrow money from their clients to get to the next town. Bankers spent their days monitoring the exchange rates of companies that imported and exported goods.
For outside observers, such antics were a source of funny stories that sounded like jokes, but were all too real. the New York Times reported that an American dining at a restaurant in Berlin asked for all the dinner a US dollar would buy. He received a satisfying meal, but as he was about to leave, the waiter appeared with another soup and another entree, explaining, “The dollar has gone up again.” Others said they bought beer and received more for returning the empty bottle than they paid for it full.
The Associated Press sent this satirical report:
“Zero stroke” or “cipher stroke” is the name created by German physicians for a widespread nerve disease caused by the current fantastic ciphers of the currency. Dozens of cases of “stroke” are reported in men and women of all classes, who have been prostrated by their efforts to number in the trillions. Many of these people are seemingly normal, except for a desire to write endless rows of [zeros].
At the end of 1923, German hyperinflation ended with dramatic suddenness. The old currency, the reichsmark, was replaced by the rentenmark. A rentenmark was worth a thousand billion reichsmarks. The government announced that rentenmarks were a sound currency, backed by first mortgages on Reich land and other physical assets. It was a meaningless public relations ploy, but reparations and strike payouts stopped, as did the printing presses of government money.
Russian workers have long had a popular saying that sums up the inefficiencies of the communist system: “They pretend to pay us and we pretend to work. If, on top of this charade, production in Russia drops to double digits and the inflation rate hits triple digits, Russians will become even more cynical and, I hope, disillusioned.
You can also read: In It For the Money: The Trump Coin Sham Beware of deceptive souvenir peddlers selling cheap souvenirs, hoping you’ll be the fool who helps them get rich. The problem with “investing” in collectibles is that memorabilia doesn’t have intrinsic value the way stocks, bonds, properties, and companies do. (Gary Smith)