 So our next speaker is Dr. Joe Salerno. Joe is the head of our he's academic VP here at the Mises Institute a long-time tenured professor at Pace University in Manhattan He's a very well-known expert on money. He's written books many many articles on it and for those of you who know the name Murray Rothbard I'm gonna I'm gonna date us all a little bit, but Joe actually knew and worked with Murray Rothbard before he died and Joe is gonna speak today about hyperinflation, but I will say this about Joe Salerno is that when he gets tired of Manhattan and New Yorkers and ice and cold He comes down and spends half of his year or so in Auburn, so we're very happy to have him and He's going to speak I guess on the topic of hyperinflation. Thanks Joe Glad to be here today to discuss Hyperinflation, which is one of the most interesting topics in the area of money It's it's known as a natural experiment meaning that it's an extreme and spectacular event That can actually illustrate a theory. You can actually see it going on in history See how the theory is working So let me just start with hyperinflation. That means extreme inflation. Obviously I Want to just mention very quickly What what we are mean by the value of money, okay? So when the prices of goods are at a certain level a dollar per coke ten dollars for pizza hundred dollars per iPod and so on that implies a Certain value of money So in other words if a coke is a dollar that means that one coke can purchase a dollar or that a dollar can purchase a coke The purchasing power of a dollar in terms of pizzas if pizzas are ten dollars a pizza Is one tenth of a pizza? Okay? If prices go up the value of money goes down so when the prices of all these things double when they go from one to two dollars per coke or Ten to twenty dollars per pizza notice that the value of money is now less So a dollar can buy you either a half a can of coke now instead of a full can of coke 120th of a pizza instead of one tenth of a pizza So what we say is that inflation leads to a shrinking of the dollar That's what it means that each dollar's purchasing power is now less eat now buys less of a particular type of good Okay What is inflation? It's an increase in the supply of money. That was the older definition Up until about the 1930s and certainly in the 19th century But today's definition is that's a general and sustained increase in prices or the price level now I prefer the older definition. I think it's more useful But we'll use the modern definition in this in this lecture Because that's the one that that is used in most textbooks in the media and so on So what is the cause of inflation in the modern sense? That is what is a cause of a general and sustained increase in prices and the primary cause is The fact that there's an increase in the money supply that the total number of dollars in your pockets Verses wallets and your cookie jars on your floorboards wherever you put it Plus the total amount of dollars in your checking accounts and other readily accessible accounts at banks is The money supply. Okay, so it's an increase in that That brings about the phenomenon that we know is inflation So remember inflation means rising prices, but it also means and more accurately a Fall in the value of money a depreciation of money So let's see. Let's see how that might work. We have we have something that Murray Rothbard used to call the angel Gabriel model So let's say you have a benevolent Angel, but he's he's economically benighted. He doesn't know anything about economics And so he notices that every time someone gets an increase in their income if they get a raise or if they win a lottery Whenever they have more paper dollars, they live better. They can buy more goods and services So he thinks well, this is true for one person Let me benefit humanity by doubling everybody's Money holdings the money that they they have in their their checking accounts the money that they have in their Wallets and so on so the next day everybody wakes up. Okay, and everyone feels wealthier Everyone has twice the amount of money. They had the day before okay And what do they do they rush out to spend the extra money? Okay, because you only need so many dollars to hold for any period of time to make the transactions that you usually make Anything more than that is extra or excess money that you can spend right away And it's burning a hole in your pocket as the old saying goes so you can spend on things that you wouldn't have normally purchased before That's the immediate effect, but the later effect is the quantity of goods have not increased Okay, the amount of iPods the Number of automobiles the amount of restaurant meals all of those things are the same overnight the angel hasn't thought to increase any of those So what happens is people rush out to spend that spend that new money that extra money Prices rise. This is there's more money now Demanding the same quantity of goods and that pushes prices up So this is simply a supply and demand explanation applied to money an increase in supply of any good and money is simply another good in the economy If the demand is unchanged and people haven't changed their preferences for how many dollars they want to hold over the course of Of the week or the pay period that extra money then loses value Okay, it goes down in value just as if we doubled the Number of cars in the US economy tomorrow. You can be pretty sure that that price would plummet. Okay, price would go down and we see this of course as Technological goods have increased for example HDTVs used to be three to five thousand dollars in 2005 and now you can get one for five hundred the reason for that is that the supply has increased so much Okay, now when the supply of goods and services increase Those things satisfy human wants and therefore that benefits humanity, but the angel did not benefit humanity the angel created Inflation, okay, so let me summarize that the inflation adjustment process. So an increase in the money supply Will cause people to spend or lend the extra money and if they lend it the person who is receiving it Will spend it they don't want to pay interest and just hold the money So that new money spent it increases the demand for goods everybody rushes out and spends it on goods and that drives prices up which inversely Forces the value of money downward And and in symbols the money supply goes up leads to an increase in demand for goods leads to an increase in the price level and Causes a fall in the purchasing power of money Okay So in today's world really who prints money the only institution legally permitted to print money is a central bank in the US That's a Federal Reserve It costs about four cents to print a dollar bill whether it's a hundred dollar bill a fifty dollar bill twenty five dollar bill During no twenty five dollar bills twenty dollar bill ten dollar bill. Okay Okay, wake up All right, so it's been Bernanke at work causing inflation Cranking it out. Okay, but that's not really how the Fed increases the money supply or any other central bank They don't really print new money They create it in cyberspace by buying government bonds and paying for them by creating reserves in Banks accounts at the Fed and and that's simply just a credit to their reserve accounts and they're called open market operations So you can see the open market operation right over here the central bank creates dollars out of thin air Okay, they buy bonds from the banks. They don't actually even send a check to the banks anymore. All they do is they With a few keystrokes add let's say they're buying a million dollars in bonds from a bank They just add a million dollars. They credit a million dollars to the banks account the bank They now tell the bank you have no more money To lend out you have more reserves So what does the bank do the bank then lend lowers interest rates and lends the money out? Okay by creating more checking accounts and then when people get those checking accounts the individuals and companies spend them That's what causes inflation. Okay, so There's a couple of guys they just have their their BA's in economics. These are the guys that are working at the open market operations desk creating money between nine Right now used to be that 85 billion dollars per month was created through the quantitative easing program That was cut to 65 billion dollars a few months ago And now the Fed has cut it to 55 billion dollars per month of new money being created And these guys are doing it via computers. That is they're buying bonds and creating reserves online And that's at the New York Fed about three blocks from my office I'll take a walk down there and have and talk to them Okay So hyperinflation is generally defined as inflation exceeding 50 percent per month that is in two months prices are doubling or more than doubling Rapid growth in the money supply always causes hyperinflation Generally the government set the stage and of course if they set the stage for hyperinflation by spending much more than they're taking in tax revenues and there and then Financing that extra spending by borrowing new money from the central banks. That's how it gets in circulation The very recently we had we had a huge inflation in Zimbabwe There were large government deficits and they borrowed money from the banks that who created it So in in August 2007 one Zimbabwe dollar that was their currency could buy a US dollar, okay? I'm sorry 245 Zimbabwe dollars bought as much goods and services one US dollar, okay, but then notice as the government printed more and more money How many Zimbabwe dollars it took to purchase a US dollar, okay? So in May it's 207 million in in June. It's it's four and a half billion It's 26 billion Zimbabwe dollars to buy that that is now equal to how much a single US dollar can buy And then it goes up to 37 Million and then they just took zeros off, okay? But they kept the plating after that, okay? and This is a sign that was put up In Zimbabwe toilet paper only to be used this toilet. No cardboard. No cloth. No sim dollars. No newspapers, okay? By by the end it was worth literally nothing. So I have some neat pictures to show you others in Bob way in hyperinflation and camera here Because as they say pictures are worth Well in this case a trillion words, okay, so Let me just so they introduce a two hundred thousand dollar note which was equal to two to ten cents, okay? So kids were just carrying around by candy and stuff They introduced the five hundred thousand Dollar note as it continued then a seven hundred and fifty thousand dollar note and of course as prices continue to skyrocket They introduced a ten million dollar note Which was equal to a ten dollar bill was ten times more than the ten million dollar bill ten million dollar note So in other words a ten million dollar note at that point could only buy about one dollar's worth of goods One US dollar worth of goods Here's a kid just Going to the store hang out in the corner This is equal to this sixty five trillion dollars of Zimbabwe in notes in this pile is worth It's worth two thousand US dollars Here's a guy going to the grocery store. Okay, this mountain of cash Is worth $100 that amount of cash with So finally instead of having people Carol a cash around they introduced a 250 million dollar bill Or actually a 500 No, 50 a 50 million dollar bill. Excuse me and then a 250 Okay, now This shirt on that rack was three billion dollars Okay It's a cactus at the top so plus three billion dollars Here's a five hundred million dollar bill Here's a hundred billion dollar bill hundred billion here's what you can buy three eggs this guy is In a restaurant and here's a restaurant bill In Zimbabwe one trillion two hundred forty-three billion two hundred fifty five thousand dollars and For that meal and it didn't like it was much. What was it one dinner one mineral water? Okay, and I but it kept going up and Eventually the currency broke down. Here's where they took the zeros off There's just over truly took zeros off. Okay And we keep going those but I want I have a few minutes left. So I want to talk about the German hyperinflation. It was even worse The German hyperinflation Came about After World War after World War one And I have a Not giving you an idea of what prices were like to this is the price of newspapers in Germany then I have a few pictures Okay, so So it started off that Price of a newspaper was a third of a deutsch mark third of a mark in Germany in January of 1921 That's after a huge inflation that went off from 1914 to pay for the war World War one But then it tripled the price of this paper tripled Okay, in a little more than a year then in October from May to October It went up eight times. So that's like if a price of a car today is twenty thousand dollars It's a hundred and sixty thousand dollars five months from now. Okay, and then then prices of a newspaper one from eight marks to a hundred and From February to September number of months went to a thousand then to two thousand In one month then in 15 days it went to twenty thousand dollars. So the newspaper was two thousand marks at the beginning of the month twenty thousand In the middle one million at the end of the month Fifteen million two weeks later and then seventy million Okay, at that point that the German government stopped the inflation Cold in the notes for every one trillion marks you had you got one new mark which they claim was backed up by land, okay And then just a few pictures and then I want to show you a couple of notes Now you heard the stories that number of stories one is that when women went to the Grocery stores, they would take laundry baskets full of marked notes, but they couldn't fit them in the grocery store So they would leave them out in the front These would come by dump out the the notes and take the laundry baskets because the laundry basket was worth more than the Notes that they contain okay, and and and you see workers with going to Different shops with with wheelbarrows full of notes. So here's here are those women. They're the laundry baskets Instead of toys it was cheaper to play with make blocks out of mark notes It's plagium stuff. It was cheaper instead of buying wood. It was cheaper to Keep warm by putting marks in your in your furnace okay the so the government had Taken over all the printing plant plants in Germany By by the towards the end of the inflation Prices were rising price were rising faster than the money supply was rising because people were expecting prices to rise Faster in the future So store owners were raising prices now and anticipation of higher prices in the future But if that's the case that means people don't have enough money to pay those higher prices even though there are you know Trillions of dollars in the economy So the government took over all the printing plants and they and they kept saying look we're not it's not us We're simply trying to print the money to keep up with the prices that are rising faster than money but they set the whole process up Themselves by beginning the inflation and at the end banks when you deposited money They didn't even count the notes because they're all one trillion dollar notes. Whatever they were they just weighed them Okay, and then they they deposited them here is a actual German note It used to be a one thing see you can see in the corner. It's kind of not bright, but it's a 1000 mark note right there When it was turned into the banks that says I'm milleured, okay milleured is a billion So all they did at the end they they didn't have enough paper to print more notes They use the old notes and they stamped. They just made the denominations higher. Okay, so Can that happen today in the US? Well Having shown you that money can be created almost costlessly in cyberspace. Yeah, I mean it could it could happen Will it happen? Hopefully not. I mean but but but the cost of preventing such an inflation is at some point to have to stop increasing the money supply and To simply allow a recession to take place because there's been so many Distortions in the economy and misallocations of resources as a result of the inflation that we have had that It's going to require a recession to to correct all of these mistakes that have been made. Thank you You